They're All Guessing
You want a better kind of future
One that everyone can share
You're not alone, we all could use it
Stick around, we're nearly there
It's Coming Up - Paul McCartney (4/11/1980)
The bear market of 2022 was brutal. What made last year more challenging was that there were very few places to hide. Historically, when stocks are falling, bonds appreciate in value to limit the damage to portfolios. But bonds did nothing to alleviate the stock market’s nearly 20% drop. The Federal Reserve, in their fight to tame inflation, aggressively raised interest rates. This crushed the bond market, leading to the worst year on record for bonds, falling 13%! Prior to 2022 the worst year for bonds was 1980, down 9%.
Interest rates are simply the cost of money. You or a corporation may need to borrow money. The ‘fee’ to do so is the interest rate. Higher interest rates, essentially raise the cost of purchasing a car, a home, expanding a business, etc. Higher interest rates are in fact, inflationary. It may sound counterintuitive that the Federal Reserve is fighting inflation (high prices) with even higher prices. This is precisely what they’re doing, they are ultimately trying to reduce demand, which in turn leads to lower prices. If you’re having a difficult time selling a home (for instance) due to high interest rates, what must you do? You must lower the price of the home to attract offers. This is exactly what the Federal Reserve is trying to do: engineer lower prices. If prices are rising faster than our paychecks (inflation), we can’t keep up, and if we cant keep up, we stop spending. Our $25 trillion economy is consumer driven. If we stop spending money, businesses are forced to lay off workers, which can lead to a recession (a shrinking economy) and even higher unemployment.
Why did we have the highest price inflation in 40 years? It was due to our response to the Covid pandemic and Russia’s invasion of Ukraine, which lead to oil prices nearly doubling. The trump administration was ill-prepared to say the least. They along with the Federal Reserve, the United States Treasury, and the Biden administration threw trillions of dollars at Covid, as did many other countries. There was an enormous amount of money in our economic system. Once we got vaccinated and left our homes, the flood of money was spent on everything from travel, goods and services, new homes, etc. Inflation can be described as ‘too many dollars chasing too few assets.’ Russia exacerbated the inflation problem driving oil from $68 a barrel to $130. Fortunately, the Federal Reserve has brought inflation down over the past year.
“In it’s brief 232 years of existence…there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.” --Warren Buffett (2/27/2021)
The bear market of 2022 made many awfully pessimistic about 2023. According to most economists and the banks that employ them, the US economy was headed for recession. On January 2nd, 2023, Bloomberg Markets published 'Outlook 2023' which included the following views from banks and financial firms:
Bank of America: Going into 2023, one expected shock remains: recession. The US, euro area and UK are all expected to see recessions next year…
Barclays: We expect advanced economies to slip into recession, and we forecast global growth at just 1.7%, one of the weakest years for the world economy in 40 years.
BlackRock Investment Institute: A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation.
Citi: …we expect US recession fears to become the driver. We remain underweight assets that are likely to underperform into a US recession.
Fidelity: …but in our view, a hard landing remains the most likely outcome in 2023. A recession is likely in the US and near certain in Europe and the UK.
JP Morgan Asset Management: Our core scenario sees developed economies (US, Europe, Japan) falling into a mild recession in 2023
You have heard me state often, forecasting is folly. I don’t make predictions. The most anticipated recession of my 31-year career has yet to arrive. Perhaps we have a recession eventually, I don’t know. I do believe these high interest rates today will slow the economy (as intended by the Federal reserve) and are likely not sustainable. But despite terrible headlines which include a new horrific war in the Middle East, an ever-growing climate crisis, a frightening rise of hate & antisemitism, and a new cold war with China, the U.S. economy remains incredibly resilient:
The stock market (S&P 500) is up 17% thru November 16th
The tech heavy Nasdaq is up 44% this year
The US economy grew at a rate of 3.9% in the 3rd quarter, blowing away expectations
The unemployment rate remains below 4%, a figure that signals full employment in the U.S.
The most recent inflation report shows that prices continue to fall, with the Consumer Price Index at 3.2% (we peaked above 9% in June of last year)
Hamilton Wealth did not predict a recession for 2023. Thirteen months ago, I wrote 'Don’t Wait' (10/20/2022), advising you to buy stocks while they were down. Buy stocks while they are unloved, and prices are low. At the time, the S&P 500 was down 22% on the year, the Nasdaq was down 32%. Since that blog the stock market is up 22% (S&P 500).
As the year winds down, the media and the internet will be filled with prognostications about 2024. Don’t waste your time, everyone is guessing and exploiting your desire for certainty. Instead, consider things of which you have some control:
Am I saving enough money to sustain my lifestyle in retirement?
Is my money working for me or do I still have too much in the bank subject to taxes and inflation?
How much money will it take to fund a multi-decade retirement?
Is my financial plan accounting for higher out of pocket health care costs as the aging population drains Medicare?
Who is going to take care of my parents as they endure cognitive decline?
What’s going to happen to my assets when I die?
I can’t tell you what lies ahead in 2024. We believe the following investment themes will build wealth over the coming years and decades:
Global Aging: companies that help us live longer, healthier lives
Digital Revolution: Technology will continue to reshape our lives
Global Growth: as the West moves away from China, other countries will fill the void (Mexico, Vietnam, India)
Cash Flow: reliable steady income from dividends and bonds
We don’t have our heads in the sand, we know the headlines are bad. However, I’m confident we can help you build a comprehensive plan to sustain you and your family regardless of what the world may throw at us.
Thank you!
-randy
The opinions expressed in this communication are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this communication is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Advisory services are only offered to clients or prospective clients where Hamilton Wealth, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Hamilton Wealth, LLC unless a client service agreement is in place.