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.
A short and punchy note today. Recent data speaks to money flows and trends favorable to small company stocks.
Taking a step back, at most basic, small companies (when successful) become large companies – a good thing. Also, small company stocks are bought much cheaper (lower ratios of price to book value) in the marketplace. The caveat is that small companies typically have less of a track record and can be more volatile.
From the recent archives of TGIF 2 Minutes – especially worth a second look as the year 2023 unfolds. Inflation recently came in at a still very high 6.5%… which seems “low” only because several months ago inflation was at 9.1%. Shelter and services (including daycare) remain the areas with highest inflation; gas, autos, computers, and sporting goods saw slower rises in still high prices. Employment remains an oddly strong component of the economy – leaving the likelihood of a “soft landing” type of economic slowdown a possibility.
Sept 2022: It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?
Will the US officially enter a recession? If so, how bad, and how long will it be?
Will there be more bankruptcies related to cryptocurrencies and trading?
What will become of the unbalanced employment situation?
The list can go on and on. For as long as most experienced investors reading this post can recall, there have always been questions that economists (similar to the weatherman/woman) attempt to answer. Readers and investors who are newer or younger can learn over time that questions regarding the economy and government/fiscal policy are what make markets operate. Everyone is entitled to her or his opinion, especially in investing:
Hurricanes can come in various forms. Whether they be the recent Ian and Nicole or the staggering Sandy of 2012 they tend to strike in the fall season. Also, in the fall come U.S. elections and historically a bit of stock market volatility. Like the weather, markets are anything but predictable. Elections can lend themselves to predictability but there are always surprises too.
This year has had a mix of all these factors. Currently amidst high inflation the stock and bond markets are trying to digest an environment of much higher and increasing interest rates – exactly how much higher is an unknown. Also unknown is the post-election reality of future policy making in Washington, DC. Interest rates are “driving the economic bus” for the time being, and government policy making will be an ongoing force running alongside. Both will affect the markets in positive and negative ways over time.
Getting through hurricane season can be a relief – but only if it is known that the storm is over. Is the storm over or getting close to being over, and where does all this leave investors and savers?
A cautionary note (please pardon the math on a Friday) on home prices and home mortgage affordability in the short- to intermediate-term future. This note can also be useful for those with HELOC loans, or home equity lines of credit, with floating interest rates.
Inflation has recently had an overlooked side effect: a decline in the amount of home that a given monthly mortgage payment buys. The obvious factor is that interest rates on 30-year mortgages have skyrocketed from around 3% about 10 months ago to over 7% today. (Note, there is a sound but painful reason for interest rates to have risen. Historically, higher interest rates are one of the most proven ways to gradually – emphasize, “gradually” – control inflation or slow down an over-heated economy).
There is no sugar-coating it: investors in 2022 have experienced the biggest – and longest – down year for stock and bond markets since the 2007-2008 financial crisis. One of the only consolations is that over the past 13 years there have been tremendous gains overall, still with a few bumps along the way. Below I outline a few more consolations, or ways to make the best of down markets.
First a quick note: For newer, younger investors it may be difficult to not yet see long-term gains having accumulated in portfolios. Know that time horizon and future earnings potential are two huge positives working in your favor.
Here are a handful of ways to make the best of down markets – and to take advantage of higher interest rates (hint: there are more positives around higher interest rates than the media lets on).
From the Archives of TGIF 2 Minutes (original post May 13, 2022) to reflect my recent purchase of I-Bonds and continued questions received:
“What are I Bonds?” The “I” in I Bonds stands for Inflation, which is why these bonds are so HOT at the moment. (Note: inflation overall is clearly not a good thing; I Bond interest rates may be one of the only things that benefit from skyrocketing inflation.)
You can skip this entire post and simply go to www.TreasuryDirect.gov and click on “How to buy Series I” under the column, “Individuals”. The website is written – literally – as if a third grader could understand it. See the * and ** footnotes below.
It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?
In the case that the US has entered a recession (not yet “declared” by the NBER) then what does that mean for savers and investors? A quick bit of background: typically, economic cool-downs come in two varieties: hard landings and soft landings.
The hard landing ends a period of economic expansion in recession,
The soft landing ends a period of expansion with a smoother period of mere economic slow-down.