Question's from Clients about our current stock market and economy:
I would think that we'd have at least a dead catbounce if we wanted to sell something.
A “dead cat bounce” (sorry for the imagery) is a short period where the market rises amidst an otherwise period of successive down days. We had a bit of a bounce recently based on some bits of good news,1) inflation data was better than expected, 2) Ukraine is willing to do a ceasefire and, 3) the Congress passed the short-term funding bill. The market responded well to this news. A “dead-cat-bounce” day can be used to rebalance some positions. There will be further market-up-days amidst this period of high volatility.
4% cd's are looking good to me. What do you think?
There is a place in almost every portfolio for the 4ish%assets. We’ve been using more Treasury Bills (short term instruments of 1 year or less) rather than CDs but both have a place in most portfolios.
The question behind the question may be, should we cash out of stocks and put it all in the 4% yielding safe investments? Answer, ‘no’. That’s trying to time the market as to when to get out and when back in. It almost never works. By the time most people get back in, the market has recovered much of its gain. Effectively what happened by then is a person sold low and bought back in high(er).
I’m wondering should we keep more cash available, or keep most of it in stocks, bonds mutual funds?
The client’s time horizon and risk tolerance is what we consider to answer this question. Having some cash available to take advantage of stock market dips is usually a good idea. Today we can hold cash in those 4%yielding treasury securities (unlike a few short years ago when yields were.25%). A person with 5 or more years in their investing horizon, and especially with 10 or more years should not sell everything and go to 100% safety. That’s no way to stay ahead of inflation (which is stubbornly stuck at 3%, and possibly rising) or grow your assets. The better approach is to underweight a riskier asset and overweight a less risky asset. If you think you have a medium to high risk tolerance and you are finding you can’t sleep given the latest(moderate) level of stock market downturn, your risk tolerance is probably not even medium. In that case we should talk about the tradeoffs for a portfolio with far greater safety (and lower longer-term returns).
If you have a lot of funds, chances are you will end up doing good (by waiting out this correction), but if you have limited funds, how do you make them grow so you have some type of security.
If your lifespan is likely 20 or more years and you a recounting on your investments for retirement money, you should have some exposure to the stock market. That said, what percentage to have in stocks becomes the key question. Stocks (or funds of stocks) is the only way to stay ahead of inflation. At the same time, bonds (government or corporate) can give us some reasonable dividends and interest and offer some protection against downward corrections in the stock market. The bottom line is, almost every client should have both. The percentages vary based on time horizon, financial need, and risk tolerance.
What are some positive aspects and positive reminders about the economy / our current state / etc., that can help dissuade minds from settling into fear and anxiety?
I love this question. We haven’t had a meaningful correction in the stock market since 2023 when the last 10% correction occurred. Corrections of that magnitude usually happen about every 18 months. Although it feels terrible, it’s not unusual. The tariff fears have shocked the system. Markets and companies hate uncertainty. Uncertainty results in pull-back of spending and bearishness of markets. We can hope these tariffs area negotiating tactic that leads to compromised agreements with trading partners, and normalized relations once again.
Positive thought #1: The economy and consumer confidence has been strong for the past few years. That’s why the Federal Reserve is not in a hurry to reduce interest rates. Unemployment has ticked up a little, but the consumer is still spending (which is 70% of the U.S. economy) and the economy is still strong. Positive thought #2: Money invested over longer time periods yield positive returns. The S&P 500 averages 10% per year over the very long term. There are periods (sometimes a few years) where the returns are negative. Both stock and bond markets have positive long-term returns. If large chunks of money are needed in a year or two or three, that money should be in very safe assets. Longer timeframes almost always work to the client’s advantage if the money stays invested in the market.
It seems like we are in a new era, but have we been here before to some degree?
We certainly are in a new political era. The tariff actions are flooding the news. Interestingly, nobody asked about my opinion on tariffs(but I’ll give it anyway). Tariffs are a “tax” on consumers. . . they raise the cost of goods and likely lead to inflation. Imagine being Walmart working on a1-3% gross margin. How can that company absorb an increase of 25% on the products it sources from China? It can’t.
We can hope this is all a negotiation tactic and things stabilize before stock market correction (-10%) turns into a bear market(-20%).
The market hit an all-time high on Feb. 19th of this year. At that point, no economist I know thought there was more than a minimal chance of recession this year. Now some very credible economists and Wall Street analysts are predicting the chance could be as high as 40%. The China tariffs appear here to stay, but hope the tariff talk for NA and Europe are just that, talk, and not implemented as planned on April 2nd.
We've been hearing that President Trump and others want to see the economy falter so the billionaires can come in and buy many assets on the cheap?
One thing is true with President Trump. . . he is a score card guy. The stock market is a scorecard he cares deeply about. He can’t be happy about this 10% correction as a reflection on his handling of the economy. The economy is believed to be the number one reason for his re-election. So no, I don’t see this as some master plan. The President’s words are, ‘we are in a transition’ and there will be ‘some pain’. Pain can be managed by careful attention and analgesics. Left unattended the pain can result in a need for emergency surgery. If we don’t avoid recession the U.S. economy will be heading to the operating room for major invasive surgery.
Do you have any insights on how efforts by the current administration to downsize or eliminate federal regulatory agencies might affect non-stock investment options such as bonds, cd’s, etc?
I don’t have enough insight to see a connection between these actions and their effect on interest rates. The effect on bonds, cds, and cash are a result of the direction of interest rates. Interest rate moves are often in response to inflation. If inflation is heading to a level the Federal Reserves thinks is problematic, they raise interest rates. They do so to slow the economy (and keep it from overheating). When interest rates rise, the price of existing bonds goes down, thus reducing the value of bonds in a portfolio. That’s not necessarily a bad thing if you have a long enough time horizon to enjoy the higher dividend yields that come with rate increases.
Are banks showing signs of taking up high-risk activities again?
There are no obvious signs, but we often don’t see the signs until things have gone too far. Remember the Silicon Valley, Signature and Credit Suisse bank failures of recent years. We do know that sub-prime auto loans are at an all time high and those more than 60 days delinquent are at their highest in the past 30 years. Mortgage loans around the U.S. are in good shape with very few delinquencies or defaults. That’s a very positive thing.
The area under scrutiny is commercial real estate loans. These loans are heavily held by regional banks (vs. the giant ones like, BofA, JPMC, etc). Many of these commercial loans are maturing in the next couple of years (as much as $1 trillion) and at will need to be refinanced at much higher rates then when they originated. If owners can’t afford to refinance it could lead to high delinquency rates and a possible recession trigger. Watch this space.
Who gets the 25% on tariff? I know who eventually paid it, but I am unclear where the revenue goes. I just cannot see how it helps our economy.
A tariff is paid by the company importing the product from another country. The money is paid to U.S. Customs. For example, China is not paying the tariff, Walmart is. There are four primary reasons for tariffs:1) the government will make money, 2) it could protect a certain industry and incentivize more production in the U.S., 3) it’s a negotiating tactic, or 4)it’s simply retaliatory against another trading partner.
While one or more of those things might come to be, the most likely scenario (IMHO) is tariffs will result in higher prices of goods to consumers and businesses. If true, that could slow consumer spending and limit business investment, both of which are precursors to recession. I’m hoping it’s number 3!
Are we headed towards a recession, or will things settle down mid-year?
Most economists think a slow down vs. full-on recession is more likely. All the tariffs talk of the last few weeks has sent a shock wave(and downturn) through the stock market. The U.S. GDP is driven something like70% from consumer spending. If consumers pull back on spending and businesses pull back on investment, a recession (and certainly a slowdown) becomes more likely.
Should I be putting my funds into something else. Gold, bonds etc?
It depends on how long a time horizon you have and whether you can sleep at night if your portfolio goes down 10 or 20%. There’s nothing wrong with having a little gold in a portfolio if you want to speculate a bit on the future price of the metal. It’s fun to watch its gyrations. Gold is simply a binary bet. It will either go up or it will go down. Regardless, it pays no dividend while you own it, and you must store it in your crawl space or pay some firm to store it for you.
Gold can be a hedge against inflation but realistically how much can you own as a percentage of your portfolio to do anything practical with it? If you want gold to guard against the doomsday scenario how will that work? You can’t shave a little piece off to buy bread or toilet paper, and besides, the company making the toilet paper has already gone out of business by that time. You may be able to make your own bread.
Bonds are great, in the right portfolio and percentage of a portfolio. After so many years of near zero interest rates we now welcome the decent dividends and interest being paid on bonds and cash. Besides the currently nice (notice I didn’t say great) yields, bonds tend to be a less risky asset class than stocks. Unfortunately, they don’t do anything to help hedge against inflation eroding the value of a dollar. Stocks are a better answer for that, which is why in most portfolios, stocks and bonds are both appropriate and necessary.
Is the market going down and will it stay that way for awhile?
It certainly has been going down. For how long, who knows? Over time the stock market goes up on average, but there are declining periods that can last days, months and in a few historical cases, even years. Statistics and probability indicate it is far better to remain in the market(at levels appropriate for your situation) than to try to time it by pulling out and getting back in later (which is usually too late to capture most of the upside).
How concerned should I be?
Concern is ok, panic is not healthy. If you find yourself moving into the panic mode it may mean you don’t have the capacity to handle volatility (i.e risk) you thought you did. If that’s you, we need to talk.
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