What's a Soft Landing?

Recently a few clients asked about what a soft landing for the economy would look like and how it might show up in the various metrics watched by market prognosticators. Soft landings don’t happen very often and there isn’t even an agreed upon definition for them so it’s natural to wonder about this.

Below I’m including some snippets from a good article on this topic by David Wessel, an economist and journalist formerly of the Wall Street Journal and frequently heard on outlets like NPR.

Of course we won’t know we’ve had one until it’s happened, but if there’s to be a soft landing one place it will show up is in consumer habits, so it’s instructive to look at Holiday spending expectations. Some reports have suggested a major decrease in expected gift buying, but I think it depends on who you ask. For example, the Conference Board surveys people on these topics and noted a difference in spending expectations for those 45 and older, who expect to spend more than their younger cohort when compared to 2022. Maybe part of this depends on who already owned a home before inflation and mortgage rates shot up?

Here's a link to the Conference Board information if you’re interested.


We’ve discussed these metrics before but the following chart from JPMorgan shows the spread between the cost of a mortgage on a home bought now versus existing mortgages. The difference in cost looks huge and it is, but what’s interesting is that according to JPMorgan fewer than 4% of American households bought a home last year. This suggests that the increase in mortgage rates from below 3% a few years ago to over 7% now hasn’t had a direct impact on the financial lives of the overwhelming majority of American homeowners. And since these folks are the ones doing much of the spending in our economy, the wealth effect that comes from rising asset prices coupled with comparatively great mortgage terms helps support this. Now, this consumption is expected to slow into the new year for a variety of reasons, but it’s not expected to crash due to unsustainable debt loads as it did before the Great Financial Crisis, for example.

Okay, now here are the article snippets I mentioned.

When the Federal Reserve is concerned about inflation, it raises interest rates to slow the pace of economic growth. If the Fed raises interest rates a lot, it may cause a recession – known as a hard landing. However, if the Fed can raise interest rates just enough to slow the economy and reduce inflation without causing a recession, it has achieved what is known as a soft landing. But there is no official definition of a soft landing. The National Bureau of Economic Research (NBER), often considered by economists as the quasi-official arbiter of dating recessions, does not define hard or soft landings. Many economists consider a mild recession with a small increase in the unemployment rate as soft – what Fed Chair Jay Powell once described as a “softish” landing.

Soft landings are the equivalent of “Goldilocks’ porridge” for central bankers: following a tightening, the economy is just right – neither too hot (inflationary) nor too cold (in a recession).

The classic example of a soft landing is the monetary tightening conducted under Alan Greenspan in the mid-1990s. In early 1994, the economy was approaching its third year of recovery following the 1990-91 recession. By February 1994, the unemployment rate was falling rapidly, down from 7.8% to 6.6%. CPI inflation sat at 2.8%, and the federal funds rate sat at around 3%. With the economy growing and unemployment shrinking rapidly, the Fed was concerned about a potential pick-up of inflation and decided to raise rates preemptively. During 1994, the Fed raised rates seven times, doubling the federal funds rate from 3% to 6%. It then cut its key interest rate, the federal funds rate, three times in 1995 when it saw the economy softening more than required to keep inflation from rising.

The results were nothing short of spectacular. Alan Blinder, former vice chairman of the Federal Reserve, noted that this was the “perfect soft landing that helped make Alan Greenspan a central banking legend.” Economic performance for the remainder of the decade was strong: Inflation was low and steady, unemployment continued to trend downwards, and real GDP growth averaged above 3 percent per year. Greenspan wrote in his memoirs that “the soft landing of 1995 was one of the Fed’s proudest accomplishments during my tenure.”

That depends entirely on how one defines a “soft landing,” a term for which there is no consensus definition. [Blinder…] says that if GDP declines by less than 1%, or the NBER doesn’t declare a recession after at least a year of a Fed rate-hiking cycle, he considers that a soft landing.

Here's a link to the full article. Check it out if you’re interested because it also includes a table showing pre-Covid recessions back to 1965 and whether the landings were “hard” or “soft”.


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Mid-Quarter Update

For this shortened Thanksgiving week let’s look at where the markets are now, sort of a mid-quarter update. You’ve likely noticed that stocks have done well over the past few weeks and bonds have perked up a bit too. The positive performance hasn’t been evenly distributed and this can lead to some head scratching when looking at your investment performance.

For example, here’s a chart showing the year-to-date (through last Friday) performance of major market indexes. You’ll see how the standout is the tech-heavy NASDAQ with the S&P 500 close behind. Then the bottom four lines on the chart are Developed Foreign stocks, the Dow Jones, Emerging Markets, and the US bond market, respectively. This same dynamic has been playing out across sectors as well with Tech, Communication Services, and Consumer Discretionary leading the other eight sectors by a wide margin.

Now let’s stretch our timing back a bit to January 2022 before inflation and interest rates became big issues. You’ll see how the Dow Jones has held up well, followed by the S&P 500 and Developed Foreign stocks. Other areas of the markets, such as the NASDAQ, are still net-negative even with how well they’ve done this year. Core bonds have been the biggest heartbreaker of the bunch, down 12% since 2022 began.

Looking at it this way should help make sense of how your overall performance is dependent on the amount money you have allocated to each of these areas. More risk tolerant investors have been making up for ground lost last year while, ironically, more conservative investors have been dragged through the mud first by inflation and then the Fed’s fight to tame it.

Here’s a chart showing how Fed policy walloped bond prices as our central bank stair-stepped short-term rates higher to fight inflation. You’ll see those steps matched pretty closely by the yield on the 2yr Treasury, for example. Bond prices move in the opposite direction of yields, so you’ll also see how this impacted core bond prices as measured by the iShares US Core Aggregate Bond index fund.

But tame inflation they have, or at least that’s the narrative that’s been helping stock and bond prices recover in recent weeks. Yes, some prices in the economy remain high but on average they’ve been falling back toward the Fed’s 2% inflation objective. One example of this is gas prices. While the Fed doesn’t include gasoline prices when it assesses inflation, the national average gas price is 15% lower since Labor Day and this absolutely moderates inflation within the broader economy.

This next chart clearly shows the quick runup and nearly as fast decline of the Consumer Price Index that includes energy prices and it’s “Core” sibling over the past three years that doesn’t. Look at those lows in the lower-lefthand corner of the chart – that’s a dramatic change in average prices and it’s overwhelmingly positive that it’s been tapering off so rapidly.

I mention this recent history because it’s been fundamental to the markets this quarter and still is today.

As mentioned above, investors have been growing optimistic about inflation coming down and staying there, that the Fed has stopped raising interest rates, and that the fabled soft landing for the economy might actually be happening. We won’t know the answer to that until well after, unfortunately, so these issues will be prevalent into next year.

That said, here are a few things to consider related to your portfolio as we prepare to close out the year.

  1. Harvesting losses – This would likely relate to bonds or bond funds and is only relevant for non-retirement accounts. Look at your “unrealized gain/loss” detail within these accounts. I’m happy to help with questions about this, but Google the topic and closely follow the steps to offset other capital gains you might have or, at minimum, use up to $3,000 in losses as a tax deduction. Unused losses carry over to following years.
  2. Rebalancing – Go back to the first two charts above. Performance has likely been mixed across your portfolio and some areas may be out of balance. Assuming you have target weightings for each of your holdings, you may want to add a bit to bonds from stocks and to emerging market stocks from domestic to bring them back to target.
  3. Start planning for next year’s cash – Harvesting losses and rebalancing present opportunities for generating spending cash for the next 6-12 months. For example, you could sell some of your bond funds now if they’re at a loss and then leave the proceeds in a good money market fund or a CD that matures when you’ll need the cash. This, instead of planning to repurchase the harvested shares only to resell them in a few months. Better to keep that short-term spending money away from market risk and earn a good rate on cash while it lasts.

As a reminder, I’m handling these topics on your behalf if I’m managing your portfolio but let me know of any special cash needs.

I’m also happy to help hourly clients with these topics but time is scarce as we approach year-end.

Happy Thanksgiving!

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When You Least Expect It

The stock market just had its best week of the year last week and bonds also performed well. I call your attention to that because it seems like it’s been a while since the markets had a good week. That sounds a bit funny when I read it back to myself because, even with all the recent volatility, broad stock market indexes like the S&P 500 and NASDAQ are up year-to-date by about 15% and 29%, respectively. That shows how mood impacts our outlook, right?

Again, I mention last week’s performance because the mood can be rather gloomy out there as we head into the end of the year. But it’s ironic and absolutely true to form for the markets that several days of good performance get strung together when most investors aren’t expecting it. It’s just Mr. Market’s way of keeping us interested.

Along these lines, my research partners at Bespoke Investment Group came out with a chart yesterday illustrating something you’ve likely heard before, that it’s time in the markets and not timing the markets that builds wealth over time.

Bespoke looked at the growth of $100 invested in the S&P 500 at the beginning of 2010 and held since, versus a hypothetical investor who missed the best week of each year because they were trading in and out, or maybe sitting on the sidelines. While both made money it was the investor who stayed the course who saw their $100 grow to $391 while the shorter-term investor’s money grew to only $194. Sometimes traders get lucky and that success keeps them going for a time, but I can attest after 20 years in this business to how hard it is for that luck to hold year after year.

Here's a chart illustrating this.

As I mentioned above, it wasn’t just stocks that did well last week. Bonds perked up a bit to get to about even for the year. This lagging performance has weighed on balanced portfolios so it’s good to see something positive coming from bonds.

Prices rose on hopes that the Fed is done raising interest rates this cycle and could even start reducing rates by next Spring. As of yesterday, investors were pricing in a 24% chance of a rate reduction in March, over 50% in May, and about 90% by July. That’s not guaranteed, of course, but bond (and stock) investors responded well to various “Fed speak” last week that seemed to indicate a “dovish” tilt in interest rate policy. This might partly be due to recession expectations coalescing around next Summer, but also because inflation has been coming back down to manageable levels. And we had news last week of the economy cooling a bit further. While you might not expect that news about our economy slowing down would be good for stocks and bonds, it is if it means the Fed stops raising interest rates. Assuming this narrative holds for a while, stock and bond prices will be volatile but will still show bursts of energy from time to time like they did last week.

What’s my point with all this? Growth, like opportunity, often appears when you least expect it, but you maximize its impact by being prepared for it. A good way to do this is to draw some clear lines in your finances between what you need to keep short-term and liquid, and what you can let ride in the markets for long-term growth to fund retirement, college costs, and so forth. Assuming you draw this distinction you should start seeing volatility as an ally instead of an enemy.

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Harvest Your Losses

It’s getting to be that time of year so this week I’m updating an earlier post relating to harvesting losses. Even though core bonds have turned positive for the year, this second year in a row of relatively poor performance from bonds may have created some opportunities in your portfolio. You’re probably in good shape in terms of broad market stock funds, but let’s review performance at a high level.

Here’s a chart of five typical index funds to give you an idea of how stocks and bonds have been faring this year. As you can see, and as we discussed recently, performance has been all over the place. Analysis from JPMorgan shows that within the S&P 500, for example, the largest seven stocks are up over 70% year-to-date recovering from a rough 2022 and have contributed over 90% of the index’s performance this year. There’s dispersion in the bond market as well based on issuer type and duration. In short, you may have some unrealized losses during an overall positive year so far.

There are different schools of thought on this, but I think harvesting losses is worthwhile for two reasons: one, if done correctly harvesting losses lowers your household’s tax bill which indirectly increases your investment performance; two, it’s a low to no-cost endeavor. For the most part we don’t have to worry about transaction costs anymore, so the only direct cost is your time. By the way, I think this last point feeds into some of the criticism of harvesting losses. It’s time-consuming and requires holding a lot of details. This hassle factor often makes it difficult for some people, including professional money managers, to want to bother with it.

Here’s a primer on how this works. Ask your tax advisor (or me) for more details. As a reminder, tax loss harvesting only applies to your individual accounts, trust accounts, and so forth, not to your retirement accounts.

First things first – Why do we want to harvest losses?

Losses in our investment accounts are referred to as unrealized, or “paper losses”, until we sell and realize them. Nobody wants to lose money and eventually losses on high quality investments will turn into gains. But it’s possible to reap some benefits from the low points along the way and that’s what loss harvesting is all about.

Say you invested $10,000 in a bond index fund that’s now worth $8,000, for a $2,000 unrealized loss. This is a core holding and the fund is high quality, it’s just down with the market. What should you do?

You could simply hold the investment as a long-term investor should. There’s nothing necessarily wrong with that. But what about that unrealized loss… shouldn’t we try to leverage it in some way? I say yes!

You do this by selling the investment (you can sell a portion but let’s assume you sell the whole thing) and not rebuying it for at least 30 days. You also shouldn’t have bought any shares or reinvested dividends during the prior 30 days. This is tracked by your brokerage firm and creates a 60-day window around whatever date you’re thinking about selling shares. Upon selling you have realized a capital loss and can use it to offset capital gains from other sales in the current calendar year or those pesky year-end taxable mutual fund gain distributions. If you’re doing this multiple times your losses stack together and you can use up to $3,000 as a tax deduction against your income. This makes your realized losses valuable at tax time. Remaining losses carry over until fully used and should show up on Schedule D within your Federal tax return.

While you’re welcome to sit in cash for a month or so after selling the investment, you can and should buy something else while you wait. And this is actually the goal from a portfolio management standpoint – to not rock the boat too much in terms of your investment mix. The tricky part is the new investment is essentially a placeholder that can’t be overly similar to what you just sold or you risk triggering a wash sale that invalidates your loss. This applies to all of your family’s accounts. No selling in yours and buying back immediately in your spouse’s account or selling in your brokerage account and then immediately buying back in your Roth IRA, for example.

The details get complicated, but a simple approach to finding a placeholder is to change management style or regions. For example, if you’re selling a passively managed broad market ETF like Vanguard Total Bond Market, ticker symbol BND, you could use an actively managed mutual fund that owns US bonds. Or you could use a California municipal bond fund (assuming you’re in CA). It’s not a perfect match and can’t be anyway but keeps you invested. That way if markets rise during the month or so while you’re out of BND you’re still getting some benefit. And if you own BND in multiple accounts, remember that you’re only selling shares in your non-retirement account, so you still have exposure to core bonds, just less for a while. Worse case, you’ll have some gain when you sell your placeholder that uses up some of your harvested loss. But that’s a great problem to have, right? Maybe markets continue to fall and you harvest more losses when moving back into your original investment. Or maybe you decide to keep your placeholder for a while – there’s no rule requiring a roundtrip.

Regarding bond placeholders, yields on money market funds and short-term CDs are still good. Schwab’s Value Advantage Money Market Fund is currently yielding about 5.2%, for example, and FDIC-insured bank CDs maturing in December and January are paying a similar annual rate. So while I ordinarily try to reinvest proceeds from harvesting losses into something similar to maintain market exposure, I think these cash equivalents are a good and simple option right now if you’re harvesting from bond funds.

Again, there’s a lot of detail here and I’ve just scratched the surface. The point is that if you haven’t harvested this year I highly suggest taking a look at your unrealized gain and loss information prior to year-end. Or if you harvested losses months ago, take another look. Maybe doing nothing is better for you right now but at least you’re making an informed decision.

And you don’t have to worry about these details if we’re managing your portfolio – we’ve got you covered.

Have questions? Ask us. We can help.

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My Never List

I’m not a futurist and my interest in science fiction is probably about average. I also try not to be a Luddite when it comes to embracing new technologies. And I try not to be a sensationalist, an alarmist, or a conspiratorialist when the conversation turns to AI. Actually, if I’m any “ist” at all I hope it’s a realist and an optimist, even if that’s challenging these days.

A growing number of news stories have told us about how neural-net technology and artificial intelligence could lead to the best or worst of us, and nobody reasonable is certain which it will be. So should we fear AI, embrace it, or grudgingly accept it? Unfortunately these questions take longer to answer than the rate at which this technology grows.

Now, I’m looking at all this AI stuff from my little corner of the world and, as I’ve already indicated, it’s not my specialty or even of great interest beyond the big picture questions that no one knows the answers to yet. However, practical considerations are popping up in my industry as in others. That, plus a couple of articles I read in recent days have precipitated this morning’s post.

The first article is from Axios and is titled, “Behind the Curtain: What AI architects fear most in 2024”. The information is summarized and is a quick if disturbing read. Check it out because, as one estimate suggests, by 2025 90+% of online content may have been created by AI. There’s more to the article but think about using an Internet where most or perhaps substantially all of what we see could be fake (meaning produced by AI versus by a human). Writing, images, you name it. Or perhaps we’ll have grown even more used to it by then…


The second article talks about the recent launch of something startling, a pendant directly tied to an AI-driven platform that could change the way you interact with the world. Or maybe it’s a looming fad that’s doomed to failure, but I don’t think so. I honestly don’t know what to make of this, so you can look for yourself. And the article links to a couple videos about the technology that are worth watching.


My main point with sharing these articles is as a leadup to something I refer to as my Never List. There’s lots of change all around related to AI, but there are things I’ll never do as part of my work for you. Instead of a line drawn in the sand, these are etched into stone.

I’ll Never…

Use AI to screen or respond to your emails. I know this offers cost savings and lots of businesses are excited about it, but I’m not going there. Every email from me or someone on my staff will be written by a human, not a bot.

Use AI to generate blog posts. This is another obvious time saver and time equals money, yada, yada. But I’ll always write my own posts. If I ever get completely blocked, and I’ve felt close to that multiple times, I’ll either write nothing or leverage links to other stories. It will be authentically me, for better or worse.

Use AI, or any third party for that matter, to manage your money. Advisors hiring others to manage a client’s money and then playing it off as being managed by the advisor has long been a problem in my industry. I’ve always chafed at it for a variety of reasons. I’ll never go that route even if AI makes it cheaper because it can never be better, at least in my view. Human intelligence, empathy, and judgement are important parts of the work I do and shouldn’t be delegated to some outside investment shop and certainly not to AI networks.

That said, I don’t fear technology and am not anti-technology either, as I mentioned already. Instead, I enjoy innovation and have reaped major benefits from the growth of the Internet, cloud computing, and so forth. I try to leverage this tech in my personal and professional life while respecting its immense power, its limitations, and its risks. We’d all probably say something similar.

However, the articles above and others like them make me feel uncomfortable in ways that are hard to express. I don’t like the idea of being inundated with fake stuff and the idea of handing over too much of my life to the growth of AI is, well, let’s just say it’s unappealing. We can and should continue to use the amazing tools available to us to enhance our lives and the lives of those around us. But we should also be careful about how far we’re willing to let all this go. That’s easier to define in business than in life, of course.

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Maybe next year…

For many months analysts have been saying a recession is on the horizon. They’ve detailed the reasons why and I’ve reiterated certain points at various times. Recession should occur within such and such months because it always has when indicators X, Y, and Z have looked like this, and so forth. I can’t tell you how many comparison charts I’ve seen in the past couple of years that offer a compelling case for a near-term recession. It’s out there somewhere, no doubt about it. But, as explorers of old quickly figured out, the horizon line never gets any closer.

Even though our economy continues to sail along nicely, dour predictions continue. Current expectations are for a broad-based slowdown sometime during the second half of next year. Whenever a recession occurs, and one will occur eventually because our economy is cyclical, what’s more interesting right now are the variety of explanations for why our economy has been so resilient.

One of the charts I shared last week offered a reason: wealthier households flush with cash are still happily spending. This surprised analysts because the consumer is supposed to be so unhealthy right now. Government subsidies ending and student loan payments resuming were supposed to cause consumption problems, and they have. However, the thinking is that a host of other factors, from homeowners having locked in low mortgage rates as incomes and home equity rose, along with remnants of Covid-era stimulus payments, continue to free up spending cash for many (but not all) households.

Here's a look at that chart from JPMorgan again.

Then this week it’s another article from the Wall Street Journal about how Americans can’t stop spending and offers reasons why with profiles of real people. This is fascinating because it dovetails perfectly with the chart from last week.

I think the bottom line is that economists and analysts are leaning on this sort of data in real time because, as with so much else post-pandemic, past isn’t always prologue. Eventually consumers will spend less and that will impact the economy. Until then we seem to be in good shape. But how long that lasts is truly anybody’s guess.

I’m only including snippets below but a link to the article will be at the end. As before, let me know if you’d like the whole thing and I can send it to you from my account if you run into the WSJ’s paywall.

Snippets from the WSJ…

Americans’ prolonged spending spree has confounded economists and resulted in a surging U.S. economy. What’s keeping their feet off the brakes?

A strong labor market, resilient savings stockpiles and rising values of their homes have consumers feeling good and willing to spend. Despite complaints about high prices, they are taking their children to concertspacking movie theaters, booking luxury vacations, buying cars and covering the costs of rent and dinners out.

Strong spending caused economists to be wrong about a 2023 recession, though they still predict cutbacks ahead.

There are signs that Americans’ elevated spending habits aren’t sustainable. Some 60% of Americans said they have fallen behind on emergency savings this year, according to a Bankrate survey. In September, they saved 3.4% of their income, about half the rate they saved in the fall of 2019, the Commerce Department said. And long-term interest rates—which make it more expensive to buy homes and cars and to borrow money—may only now be reaching the point where they will slow Americans’ roll.

Nevertheless, many of the factors that have driven the 2023 spending binge remain intact.

Americans are feeling rightfully confident about their job prospects and paychecks. 

“The strength of the labor market and the strength of household balance sheets has helped Americans weather some of that storm” of inflation, said Daniel Zhao, an economist at the jobs website Glassdoor. 

The cost of financing a home has marched higher since 2021, putting the average 30-year fixed mortgage near 8% and keeping many would-be buyers on the sidelines. Plenty of Americans who locked in low mortgage rates, though, have extra cash. 

Roughly 90% of mortgaged homes have a rate below 6%, according to calculations from Mark Fleming, chief economist at First American Financial Corp. About two-thirds of American households own their home, according to the Census Bureau. 

The pandemic gave Americans the opportunity to stockpile savings, and many are still benefiting from that cushion.

Overall, Americans accumulated more than $2 trillion in savings above the prepandemic trend by August 2021, according to estimates from the Federal Reserve Bank of San Francisco. Recent estimates of the remaining excess pandemic savings range from $190 billion from the San Francisco Fed to between $400 billion and $1.3 trillion from economists at RSM.

Pandemic-era savings also went to paying down debt, said Jonathan Parker, a professor of finance at MIT Sloan. That gives consumers room to borrow, even if they have burned through some of the extra savings, he said, adding that, “People have a fair bit of debt capacity before they start hitting constraints.”

Prices for many items are rising more slowly than they were a year ago. But consumers remain fixated on how much lower they were before the pandemic, a mindset that may be driving some people to buy a car or fix their home while they can still afford it.   

The experience economy continues to boom, with Delta Air Lines reporting a record 30% jump in earnings in the quarter ended in September and Ticketmaster selling more than 295 million event tickets in the first six months of 2023, up nearly 18% year over year. 

Again, here’s the link to the article that includes profiles and some interesting charts.


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