Category: College Saving

Deja Vu – Recession or Soft Landing?

Check out the TGIF 2 Minutes (cut & pasted below) from September 2022 when nearly everyone – especially the media – was saying the US was already in a recession. Today, the potential recession scenario seems even more compelling but somehow the US economy has crept along.

Currently in 2023 and in times like this, it pays to keep a sharp eye on spending and debt levels while maintaining a long-term outlook with savings and investments. If the US does creep or crash into an actual recession, emergency funds with calculated levels of cash can soften the blow. The following points are worth reiterating.

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How Long Does It Take to Tame Inflation?

  • Excerpts from a TGIF 2 Minutes written 11 1/2 months ago follow.
  • Today, the US Fed is not finished raising interest rates.
  • Inflation is still around for multiple reasons.
  • Note the emphasized comments in bold.

Wind back to October 2022: A question that may be on a number of people’s minds was, “How long will it take to tame inflation?” Unfortunately, there was very little telling. Part of the reason is that inflation is always part of a complicated economy. Predictions about the timing of inflation (and hard-landing/soft-landing) are nearly impossible.

To add to the confusion, emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle (as of October 2022), inflation had already stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation would not go away quickly. The US Fed had stated one of its original intentions was to lower consumers’ inflationary expectations. But the Fed may have missed that boat late in 2021 due to forces out of its control, namely, the pandemic aftermath. Note that today in late September 2023 inflation is still running strong.

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A Little Paranoia Can Be OK

From the 2022 Archives of TGIF 2 Minutes with a few updates…

Record-breaking, big outlier events tend to move the needle to extremes in the economy and stock market. Note the word, “outlier”. Outlier events typically are surprises and are often unlikely. In his beyond excellent book The Psychology of Money* author Morgan Housel lists five events that were outliers over history in the US with world-changing consequences:

  • The Great Depression
  • World War II
  • The dot-com bubble
  • September 11th**
  • The housing crash of the mid-2000’s.

A conclusion could be drawn from the book’s chapter titled, “Surprise!” that surprises are perhaps the most reliable thing going. But the irony of the reliability of surprises is we do not know what the surprise is until after it has unfolded.

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Difficult Spending Realities

*Please see footnote below for a CORRECTION to last week’s edition, TGIF 2 Minutes – Tax & 401k Infor for ALL Ages. Thank you to my astute readers!

On to this week’s edition:
So far, 2023 has been a decent year, even slightly better than decent, for the stock market and the short-term end of the bond market (total return).

When times are mostly good it becomes easier to feel comfortable spending more money or making major purchases. BUT –

  • as we are still in a fairly dire inflationary environment,
  • with longer-term consumer price effects still to be seen (up or down, but most likely UP)
  • and following over 12 months of Federal Reserve interest rate increases,

currently it makes sense to thoroughly think through – and take more time (perhaps a couple of years) – making major spending decisions.

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2023 So Far So Good…

Superstition is not a strategy, although elite, professional athletes subscribe to superstitions all the time*. The reason for bringing up the topic is that talking about the stock market’s positive performance year-to-date in 2023 could warrant dialing back the optimism – for superstitious reasons! Hence, the “…” in the title “So Far So Good…”.

This said, the US stock market just finished a strong 2-month set of returns, in addition to an excellent January and stable returns in between. This positive performance has no guarantee of continuing but is evidence that staying in the stock market for the long-term – with a plan – can have positive long-term consequences.

  • The S&P 500 is up 16.4% year-to-date.
  • The Nasdaq over the same period is up over 31%.
  • The Russell 2000 Index of small companies is up 9.2%.
  • The Dow Jones is up 6.1%.

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Review: What Could Happen in 2023

Since it is approaching mid-year, it makes sense to look at a few data points from the start of 2023. Back in January, TGIF 2 Minutes took a look at two charts:

  1. How much more expensive growth stocks were (and are) versus value stocks (top chart)
  2. Average US stock returns following big downturns in markets (bottom chart)

Read on for the review from earlier in the year, followed by a June 2023 update. Continue reading “Review: What Could Happen in 2023”

The Mega-Cap 7 or 8

There is a narrowness to the US stock market’s “strength” so far in 2023 that warrants attention. Out of the five hundred US companies in the S&P 500 index, if not for seven of them (or eight, if Netflix is included) the index would be down for the year.

These seven or eight companies are all mega-capitalization technology companies: Nvidia (whose chips are currently fueling white-hot artificial intelligence), Apple, Microsoft, Amazon, Meta (formerly Facebook), Alphabet (parent of Google), Tesla, and the 8th is Netflix (arguably as large and hot as the rest).

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Why Save & Invest?

 

The question, “Why save and invest?” is one not emphasized nearly enough. Often, savers and investors – whether having accumulated millions of dollars or those just getting started – focus almost exclusively on the various investments themselves, without first and often taking a step back to establish the “WHY” of investing.

The WHY can vary greatly, which is the reason the question is so meaningful.

Just this week I heard about the show currently on Netflix called “How to Get Rich” (haha, I may have just lost a few readers who will jump to find out more about the show). But it is not the show that is the focus of this week’s edition of TGIF 2 Minutes but rather one of the ideas behind the show. The idea comes from the author and successful entrepreneur, Ramit Sethi. One of the key ideas Sethi emphasizes is the “rich life” we all may wish to attain.

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US Debt Ceiling

Currently the limit on the amount the US government can borrow is a mind-boggling $31.4 trillion. This limit was reached this past January and since then the US Treasury has been using “extraordinary measures” to continue to pay government bills. Funds from these measures, such as using available tax revenue or borrowing from the retirement accounts of federal workers (not allowed by private employers), are said to become exhausted by about June 1st or so.

The government borrows (or issues debt) because it spends more than it takes in via tax revenue. These borrowed funds are used to pay government workers, but for numerous other critical reasons including:

  • continuous payments to Social Security recipients
  • reimbursement to doctors for Medicare
  • salaries for US Military and military contractors
  • payments on existing US Treasury debt

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I-Bond Update

For a bond that must be held for a minimum of five (5) years for full interest to be received and can only be bought in amounts of $10,000 per year, I get a lot of questions.

To put the situation in perspective, for clients and friends with high levels of income, in the hundreds of thousands and much more, and high tax rates – marginal rates of over 32% – the interest at stake with an I-Bond is currently $600 to $800 per year and that is before taxes! That level of net interest may pay a portion of one car lease payment per year or weekend gas for a boat (in 5 years). BUT nevertheless, I get questions.

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