October 28, 2023

By Andrea Young on October 28, 2023

Where’s Our Head?

Market Odyssey: Navigating Difficult Waters

Client Letter- October 2023 
By Bruce Thompson
Managing Director – Senior Wealth Advisor

Is there no way of escaping Charybdis and at the same time keeping Scylla off my men?”

–Homer, The Odyssey

That was Odysseus’ quandary as he attempted to sail, idiomatically, between a rock and a hard place. It is an apt metaphor for the current investment backdrop, as stock and bond investors navigate mixed signals for the economy and markets.

The sharp recovery following last year’s rough waters brought stocks to within hailing distance of a new high by early July. The rally was fueled partly by oversold conditions in the stock market, and partly by a growing belief that we may successfully steer through inflation and higher interest rates without a recession. Indeed, over the last year, CPI has declined sharply from an annual rate of over 9% to 3.7%, while the economy remains on track to grow about 2.3% for the year. 

In Q3, though, markets pulled back as investors came face to face with a tricky irony – continued resilience in employment, consumer spending, and housing prices may be watering down the Fed’s efforts to lower inflation back to the averages of the last few decades. 

In September, the Fed paused on hiking interest rates, citing reduced pressures on prices and the labor market as the reasons. But it also announced that it may keep rates higher for longer than hoped, creating a near-term headwind for stocks and bonds. 

As Milton Freedman famously said, “Monetary policy operates with long and variable lags.” The full force of the Fed’s rate hikes – 5.25% since early 2022 – won’t be known and felt until sometime in 2024, particularly as respects employment and housing, for which the impacts have been delayed in past cycles. Also, consumer spending has been resilient, but the combination of waning pandemic-related savings, the resumption of student loan repayments, the UAW strike, the recent upswing in oil prices, and rising consumer debt delinquencies will weigh on the markets’ calculus as we enter 2024. Meanwhile, the threat of a government shutdown has been averted at least temporarily with a last-minute deal in Congress.

Click HERE to read the full letter.

Market Commentary

Catching a Falling Knife
October 20, 2023

A lot of people have been asking me lately why the stock market has taken a downward turn. I must admit, I can come up with a lot of answers to the question: The economy is having to contend with the removal of an unprecedented amount of fiscal and monetary support; we have a dysfunctional government that can’t even agree on leadership within its own ranks; federal government debt has spiraled out of control and the U.S. credit rating could be cut again soon; banks are tightening lending standards in response to rising credit losses, deposit flight and higher capital requirements; the housing market is frozen for lack of supply, and commercial real estate is suffering a major downturn; geopolitical uncertainty abounds as the Ukraine War continues and a new war begins in Gaza; and the Chinese economy, which had been the engine of global growth for so long, is undergoing a major deceleration. I could go on. In fact, perhaps a better question might be how were stocks able to hold up so well in the face of these formidable headwinds.

But perhaps the best explanation for why stocks are falling is much simpler. After all, the domestic economy has defied all expectations and held up quite well in the face of all the aforementioned factors. The Atlanta Fed’s GDPNow forecast is currently calling for GDP growth of 5.4% in the third quarter on top of the 2.1%-2.2% pace in the first half of this year. Earnings for the companies in the S&P 500 are expected to rise 7%-8% this year and another 10%-11% next year. Inflation has dropped all the way from 9.1% in mid-2022 to 3.7% in September of this year (Consumer Price Index). The Fed appears to be done raising rates.

So what is causing the stock sellers to come out in force? The answer is probably that the stocks now have formidable competition. Rather than enduring the short-term volatility and uncertain returns associated with stocks, investors can now earn 5% or more with no credit risk by owning U.S. Treasury bonds. The chart below shows that not only do Treasuries offer much higher interest rates than the stock market’s dividend yield, but Treasury yields are now approaching the stock market’s earnings yield as well! The earnings yield is simply the inverse of the P/E ratio, and it represents another way to track how much investors are willing to pay for a dollar in corporate earnings. At the moment, the earnings yield for the S&P 500 is 5.7%, or the inverse of the current P/E ratio of 17.5x. The difference between that 5.7% earnings yield and the yield on the 10-year Treasury bond is now just 0.76% – by far the lowest in the past 10 years. The interpretation of this is that investors are not getting compensated nearly as much for the added volatility assumed by owning stocks.

How much should we read into this analysis? Probably not too much. After all, interest rates could fall just as quickly as they rose if the economy shows signs of faltering. Still, it is interesting to me that there hasn’t been greater substitution of stocks for bonds than we have seen. After all, investors haven’t been able to get “risk-free” returns like this for many years. Could this mean that interest rates are headed higher still? I guess it’s possible. At some point, though, it will become clear that the economy can’t withstand interest rates this high for an extended period following many years of near-zero borrowing costs. When that happens, those brave enough to “catch the falling knife” that is the current bond market will start to look pretty smart.

Warren Buffett likes to say, and I paraphrase, that people love to buy hamburgers when they are half price, but they run from stocks and bonds when they have dropped in value. Well, this year is shaping up to be the third straight losing year for the most widely followed bond index, the Bloomberg Aggregate. Prior to last year, that index had never been down for even two consecutive years since its inception in 1975. On the equity side, we are also starting to find some really good value in defensive, blue-chip stocks that are not among the seven largest technology companies responsible for the vast majority of the S&P S00’s year-to-date return. Investment opportunities, which had been so rare for so long, are beginning to materialize.

Peace, 

Michael

Our Latest Insights

*Source: Federal Bureau of Investigation Internet Crime Complaint Center. Accessed September 27, 2023.

Cybercriminals are relentless. As individuals and businesses adopt new behaviors and technologies to stave off attacks, they evolve their techniques and find new targets. Losses from cybercrime continue to climb, with a record $10.3 billion in 2022 ― which only includes those tracked by the FBI.i Actual losses are likely much higher.

The good news is that with education and a few relatively straightforward best practices, you can significantly strengthen your cybersecurity defenses. To that end, here are common scams to watch for and recommended best practices for avoiding them.

Click HERE to read our latest insights.

Our Fall Event Recap

Thank you to everyone who attended our fall event, Possibilities, Challenges & the Potential of Artificial Intelligence & Navigating Your Investment Portfolio in an Uncertain Market. We’d also like to extend a huge thank you to our guests for the evening Dani Fava, Group Head of Product Innovation at Envestnet, Jon Radoff, CEO of Beamable and Bradford Long, Managing Partner and Chief Investment Officer at Fiducient Advisors. 

Dani guided us through the exploration of emerging trends in Artificial Intelligence and its potential. This included where AI has helped and where it has encountered challenges. Additionally, Dani discussed what motivates AI-based innovation, and a look at its future.

During the second segment of our event, Brad Long joined Mike Tucci, our CEO, for a fireside chat regarding the present state of our markets and our outlook for the upcoming months.

Please enjoy some photos from the event. We will be sharing the event recording in the coming days.

Where’s Our Heart

Well-thy Conversations

College Preparation, Admission and Beyond

College admissions and the preparation process looks very different today than in years past. This can be a stressful time for students and their parents as they move toward this new phase of life. Parents who haven’t navigated the process since their own applications—or ever!–may be seeking guidance on how to support their students and keep their own sanity.

In today’s increasingly competitive college admission landscape, factors such as extracurricular activities, challenging courses, and college essays have gained heightened significance. One pivotal change in the college admission process is optional standardized testing. This has led to greater competition and a larger applicant pool at most colleges (fed, as well, by the “common app” through which the click of the return key sends applications instantly to as many colleges as a student wants, and wants to pay for). Consequently, the percentage of applicants accepted has declined at a lot of colleges, reaching unbelievably low numbers (one school in the northeast had an acceptance rate under 1%).

Please enjoy this webinar replay with Andy Greenspan, Director of College Advising for International College Counselors. 

Our Latest Empower Women Podcast

Check out our October Empower Women Series Podcast interview, Women’s Health in Midlife, with Danielle Stare. Danielle discussed various topics around women’s health including breast health for Breast Cancer Awareness month, reproductive aging and sexual health, nutrition and bone health. 

You can also read our event takeaways by clicking HERE!

To Listen to the podcast episode, click HERE.