PFP - October 2023 Newsletter
One important note before we get into our economic summary of the third quarter of 2023: we have team members and clients directly impacted by the violence in the Middle East. As an office we continue to pray for peace and resolution to the situation.
It is hard to believe the year is almost over. Prehmus Financial Partners will soon be celebrating its 29th anniversary of serving clients. We now have clients in nearly every state of the country and in numerous stages of life. It is a true honor to serve such wonderful people. We have been so fortunate to continue to grow without advertising and being selective of who we work with. This only happens because you share our name and the work we have done for you. Thank you from all of us!
HOUSEKEEPING
Required Minimum Distributions (RMDs) for 2023 – For those of you age 72 and above you are required to withdraw a certain percentage of your taxable retirement accounts each year. Many of you have completed this already for 2023. If you have not, we will be doing so before year-end. One thing to remember or discuss with your advisor is how the qualified charitable donation may benefit you. This is when you give to your church, charity, or any non-profit organization directly from your IRA. Fidelity has a great system to do this, and our office can help facilitate if you have the name of the organization and the mailing address.
https://consumer.gov/scams-identity-theft/recovering-identity-theft
Identity Theft – Security of our clients’ data is critical to our firm, and we heavily weigh the ability of our vendors to keep client information safe and confidential. Fortunately, we have experienced minimal issues in this area, but it is something we continue to monitor. It will never be perfect, but it is important for our clients to know how seriously we take this. Many of you probably have heard about the Clorox company being hacked. Even the largest entities in the world can be subject to such violations. We wanted to take this opportunity to draw everyone’s attention to what you can be doing to monitor identity theft. If you are unsure how to monitor or what to do, then the below link should be a good resource for you.
College-Aged Children - For those of you who recently had a child leave for college, here is one extra thing to keep in mind. Once your children turn age 18, they are legal adults. This means you are not able to make decisions on their behalf nor get medical history without their consent. It may be wise for you to have a healthcare power of attorney or general power of attorney drawn up by your attorney or an online service. This way you can handle affairs for your children that are still under your support should the unexpected happen.
MARKET SUMMARY
The economy and markets are rarely boring and current times are certainly no exception. As you all know, we spend much of our time listening to the views of experts in various areas. We take in copious amounts of information from numerous respected firms. Then we break it all down and use it to provide direction on how to position our clients respective of their financial goals and risk tolerance. Rather than go on about all the different views and influences in the markets, we figured we would address some of the top questions we have been asked by clients recently.
After a positive first half of 2023, why did stocks struggle in the third quarter? The first half of the year was driven primarily by seven stocks that have become known as the “Magnificent 7”. These stocks are Apple, Microsoft, Nvidia, Tesla, Meta, Google, and Amazon. Most of these stocks performed poorly in the third quarter, leading the overall indexes lower. According to the S&P Global research, the S&P 500 only gained 1.8% for the first 3 quarters of 2023 if you remove those 7 stocks. Foreign stocks returned under 6% year-to-date through September. The bottom line is that being diversified has not been beneficial thus far in 2023; remember though--in 2022, it was very beneficial. There are some great opportunities in the stock market right now. The old phrase “The key to successful investing is time in the market rather than timing the market” certainly applies now. Ensuring your portfolio time horizon meets your needs is our job, in addition to finding long term success stories. That is what we continue to do, and down quarters in the stock market create opportunities because they allow investors to buy things at lower prices.
Will we have a recession and, if so, what would the impact be on financial markets? Our senior partner, Warren, frequently quotes a phrase that many of you have heard. It is “predictions are hard, especially when they are about the future.” The data certainly seems to show the private sector slowing down and that higher interest rates are having their intended effect on housing and auto sales. Perhaps more importantly is that the Federal Reserve has been reducing their balance sheet at the fastest pace we have seen in 90 years. This essentially means we were injecting money into the economy for several years (what’s known as “quantitative easing” (QE)). That is over and we are now in a “quantitative tightening” (QT) mode. This is nothing to panic about, simply part of the economic cycle. It is necessary to unwind the excesses created in the prior years. Based on history, this would lead one to believe a recession would start seven to nine months after the final interest rate hike by the Federal Reserve. As of now, the last rate hike was this past July. So that is what history tells us; but the future is the future and only time can tell what will really happen. I will get into more of the arguments against a recession in the last queson.
What should we be earning on cash reserves and emergency funds? These days we recommend clients reach out to us if they are not earning over 4% on their cash. We are finding CD’s and treasuries routinely paying well over 4% and in some cases much higher, depending on liquidity needs. If you would like guidance in this area, please reach out to schedule an appointment with your advisor.
Where and when will interest rates peak? This is another prediction about the future, so nobody knows for sure and it likely will depend on what happens with the economy over the next three months headed into 2024. The majority of economists and strategists we have met with believe we are very close to peak interest rates. They base this on deteriorating economic data. However, a reasonable argument to this is that if China and other foreign countries don’t continue to buy US treasuries then this would reduce demand and therefore could put pressure on the rate investors will accept to lock up their money. In summary, the Federal Reserve works to control interest rates by adjusting “Fed Rate” but there are extrinsic factors that could keep rates higher or lower. This is, in large part, the supply and demand effect of US treasuries.
How can the United States ever repay 33 trillion of debt? First, it is important to understand this is not unique to the United States. There is nearly 100 trillion dollars in government debt in the world. The most important thing is that a borrower can service the debt they have. The US services debt through taxation. The challenge now is that higher interest rates are driving up the cost of servicing the debt. Some predict it will be necessary to raise tax rates or reduce government spending to afford this. The US economy is currently the strongest economy in the world based on GDP. There are numerous reasons why, including capitalism, demographics, energy independence, and security. The good news for the US economy is that these factors are becoming more popular and attracting businesses to return to the US that previously left for other countries.
How will the geopolitical issues around the world impact our economy and markets? The geopolitical tensions are unfortunate (and in several cases, devastating), and it reminds me how blessed I should feel to live here in the United States. Yes, we have our problems to work through—always have and always will. We are watching closely how these tensions could further impact the economy and markets. Thus far, our global experts see a continued pressure on certain commodities due to the Russia-Ukraine situation. But this seems to be largely baked into the economy. This is a very fluid situation that we are working hard to keep on top of and will make any adjustments to our portfolios as needed.
What bright spots are you seeing for the US economy and investors? Sure, it is possible to have a recession in 2024. That would impair the near-term investment horizon. It would create buying opportunities for the long-term minded investors. Currently we see various buying opportunities in pockets of the market for those that have a 3-5 year or longer time horizon. Very few predicted the strong first half we had in 2023. We recommend easing into markets and talking with your advisor about ways to protect against some of the potential downside, so you can capture the potential upside. We believe most investors will be more successful with that strategy rather than trying to time markets.
o Higher interest rates have created opportunities for both short and long investors. For the shorter-term investor, it is a relief to see yields near 5% in conservative assets such as CD’s and notes. Using investment solutions with buffers against loss such as buffered ETF’s and bank notes continue to be an option with rates much higher than we saw before the interest rate hikes.
o Productivity has improved dramatically over the last decade. Technological advances in healthcare, communications, and safety have made the average human more productive. This will continue to accelerate as the US is regaining market share in manufacturing and increasing its independence in technology. In addition, the US has a strong younger population, ages 25-32, looking to form households in the coming decade. Our age demographics are much better than most countries in the world.
o The employment data has remained stronger than one might have expected as mortgage rates near 8%. Bullish economists and investors argue bearish folks are overlooking the impact of the government infrastructure programs. There are 37,000 of them! We heard from the president of a construction company how busy they are with infrastructure programs such as roads, bridges, etc. He said the difference is that 5 years ago his business was 70% private sector. Today it has flipped and nearly 75% is government work. One can argue whether this is a good or a bad thing—I am not here to do that. The point is that government spending on infrastructure could soften the blow otherwise felt by higher rates and QT by the government. Therefore, some experts argue this could prevent or lessen the impact of recession.