A Grab Bag

How many times have I started these posts this year with something along the lines of “It’s rough out there for investors…”? Doing so often leaves me feeling like Captain Obvious but, as they say, it is what it is.

This week I’ll jump right in because I want to share a variety of information about what’s happening in the markets.

September is typically one of the worst months of the year for investors, so a few more days and then it’s good riddance as we enter the fourth quarter, usually the best time of year for investors. We’ll see. So far in 2022 major stock indexes are down from 18% to 30%, so Mr. Market has his work cut out.

News from the past week shows us what we already know: the market’s mood is nasty right now and the few positive catalysts tend to be drowned out by negative noise. That shows up in market breadth (stocks advancing vs declining, currently the lowest it’s been in decades), volatility levels, and investor sentiment surveys. Sentiment is a known contrarian indicator, albeit an imperfect one.

This chart from Bespoke Investment Group shows the American Association of Individual Investors sentiment survey over recent decades. You’ll see via the red line that we’re at the level of extreme investor bearishness. News like this should make the contrarian’s ears perk up because, as the Warren Buffet quote goes, we should buy when others are fearful. But the timing on this isn’t perfect. The next chart uses the Great Financial Crisis to show that extreme bearishness can begat more extreme bearishness in the short-term before the market finally turns positive.

The good news is that from a historical perspective, from this point on and even more so should sentiment worsen from here, return expectations for the year ahead and beyond only get better.

What could make sentiment get worse? The Fed. They raised rates again by 0.75% last week for a total of 3% this year. A major problem with this is, even as Fed Chair Jerome Powell has reiterated in recent days, rate increases “have a long and variable lag”, meaning that even one increase can take months to play out across the economy. And we’ve had five since March with more expected. There’s a growing risk that the Fed has pushed too far too fast, setting the stage for unanticipated consequences within the economy. Also in recent days members of the Fed, including the Chair, have doubled down on their willingness to allow people in the economy to go through “pain” while trying to avoid “deep, deep pain” (whatever that means) as the Fed fights inflation. It’s reasonable if statements like those don’t inspire a lot of confidence.

This next chart from JP Morgan provides some historical context for Fed hiking cycles and it’s easy to see the quickness of this one. As the Fed lowers rates they’re said to be spiking the punchbowl. If you’ll pardon the analogy, these rate increases could be like walking into the party and doing five tequila shots at the door. Maybe you’d be okay if you spaced your shots throughout the night. But slam five back-to-back and you’re asking for a long night and a hangover.

The rapid pace of rate hikes coupled with evolving rhetoric from the Fed have roiled the bond markets this year. And comments like, “Nobody knows whether this process will lead to a recession,” coming from the Fed Chair last week don’t help, even though he sounded reasonable and truthful (would investors rather he lied?). Nonetheless, it freaked investors out. The Bloomberg Barclays Bond Index, sort of like the S&P 500 for the bond market, declined a bit further and is down almost 14% this year, something very rare for bonds.

These gyrations have led to inversions within the yield curve, an important indicator that we’ve discussed before. These inversions steepened last week.

For example, as I write you can buy a US Treasury maturing in two years and earn an annual rate of 4.26%. If you bought a 10yr bond you’d earn 3.85%. That lower yield on a longer bond (the inversion) doesn’t ordinarily exist and is said to be a strong indicator of a looming recession. And for many investors the difference being relatively large cements recession expectations.

NPR had a good article (with audio, about 4 minutes) discussing the bond market this year. Give it a listen for a straightforward reminder of how bonds work and why, even amid all the chaos, they’re still good to own.

https://www.npr.org/2022/09/25/1124838564/stocks-and-bonds-both-get-clobbered-this-time-heres-whats-behind-the-double-wham

Consumers are facing challenges but it’s not all bad. Inflation is high but some prices, such as for gasoline, have been falling. Last week the AAA national average price for gas ended its especially long run of 98 days of declines. This next chart from Bespoke shows what a wild ride it’s been for gas prices this year.

Gasoline is a relatively small component of the CPI inflation measure, but it’s psychologically important for consumers, with lower prices usually being a boon for confidence. But not lately. Maybe that’s because compared to last year gas prices are still about 26% higher and housing costs, a larger portion of CPI, are up with no near-term signs of slowing. On the positive side, consumers and investors are holding a large amount of cash measured in the trillions. This lessens the impact of inflation for most people and provides money to invest when, and not if, sentiment finally turns positive.

So what are you supposed to do with your investments in this sort of environment? In all seriousness, hang on for dear life. We’ve been through a lot of rockiness and there may still be more to come. Your investments have been taking a beating, but their prices will recover.

Remember that the thousands of stocks represented in your diversified portfolio are actual companies that are still in business. They were today and they will be tomorrow. And the bonds are issued by entities like the US Treasury, high-quality corporations, and perhaps states and municipalities. The vast majority of these bond issuers will continue to pay interest on schedule. The share price of the stocks and bonds has fallen, mostly because it’s too hard to price them amid all the uncertainty, but their fundamental, long-term value remains.

Focus on structural issues like investment quality, cost, and rebalancing. The latter has been challenging this year for a variety of reasons, but the process still works and the discipline still adds value.

The other thing to do: Ask questions. Don’t let them fester. You’re likely in better financial shape than you realize, or than it seems from watching the news, so try not to let anxiety get the better of you.

Here are a couple links to Bespoke’s work if you’d like to check out their research.

https://www.bespokepremium.com/interactive/posts/think-big-blog/the-streak-is-over

https://www.bespokepremium.com/interactive/posts/chart-of-the-day/chart-of-the-day-bearish-sentiment-soars-but-might-not-have-peaked

Have questions? Ask me. I can help.

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Updates on a Few Areas

This has certainly been a rocky year so far for investors. It seems like it’s been a while, so I wanted to give you a quick update on where we stand in a few areas.

Inflation –

Official numbers for August that came out this morning were expected to show inflation declining a bit because oil and gasoline prices have been dropping. But this was more than offset by increases in housing, food, and medical care, according to the Bureau of Labor Statistics. For example, food prices were up 11.4% in the past 12 months, the largest increase in over 40 years. All told, inflation was running at an 8.3% annual rate in August.

Stock and bond markets were set to rise with the expected inflation decline, so news of continued high inflation turned the stock market on its heel.

The Markets –

Year-to-date through last week the S&P 500, the standard index for US stocks, was down almost 14%. The tech-heavy NASDAQ index was down 22%. Foreign stocks, both developed and emerging markets, are down 19%. And medium-term bonds, what most people have in their portfolios, are down maybe 8-15% depending on type.

The worst performing sectors were Communication Services and Technology, down 28% and 21%, respectively. Had you perfect foresight (or dumb luck) to be all-in on the Energy sector at the just-right time, you’d be up 48% this year. That sector along with Utilities, which is up nearly 10%, are the only two positive sectors out of the 11 that make up the US stock market.

Stocks have been rangebound lately, as market technicians say, moving up and down between shorter-term averages but lacking the oomph to take lasting steps forward.

The following chart comes from my research partners at Bespoke Investment Group. (The small print isn’t that important, so don’t worry if you can’t read it. Just focus on the trend lines to the right.)

Gyrations in the markets have largely been caused by fears about the Federal Reserve raising interest rates too quickly to fight off inflation and sending the economy into a recession. And these fears were stoked yet again this morning with inflation running hotter than anticipated. Fundamentally, the various narratives around this have been about jobs and the health of the consumer, and how this could change as the Fed raises rates.

Jobs and the Consumer

Here are some updates from JP Morgan Chase. The big bank has an interesting perspective on consumption because they can analyze government data like everyone else, but can also look into bank customer transactions, balances, credit use, and so forth.

This first chart shows how much Americans are saving and how this has changed over time. You’ll clearly see the massive spikes caused by staying home and changes in buying habits during the pandemic coupled with the timing of government stimulus. Payments stopped abruptly late last year, and we can see how that cratered the savings rate. Many economists assume the savings rate won’t deteriorate much further if the job market remains solid, but that’s obviously a big open question.

With the Fed trying to slow the economy to fight inflation, how long before the job market starts getting squeezed? This next chart shows something called the Beveridge Curve. While this might sound like a visual representation of the angle at which one’s beer meets one’s mouth, it actually shows the relationship of job openings to the unemployment rate. This concept is important because it’s often pointed to by those expecting a soft-landing for the economy versus outright recession.

The main takeaway from this comparison between the before-times of the Great Financial Crisis up to Covid, and then post-Covid, is there are a lot more available jobs now and the unemployment rate is much lower than when we were coming out of the GFC. Seems positive, right? Soft-landing proponents see the job market as having room to slow before becoming a drag on growth. And they’re quick to point out that we’ve never had a recession when the job market has been strong. But naysayers suggest that the Beveridge Curve, as with many traditional economic metrics post-Covid, means less because much of the job market remains destabilized. Only time and data will tell who’s right.

The Housing Market and Interest Rates –

Mortgage rates are linked to the bond market. The 10yr Treasury bond, a key benchmark, rose again last week to about 3.3% after a volatile summer. This brought the average rate on a new 30yr fixed mortgage to about 6.1%, a hairsbreadth below a summer high of 6.2%. That’s double where it was this time last year. This increase in rates has pummeled the refi industry and is adding a lot of pressure to housing market.

According to Redfin, there’s been a drop-off in a range of real estate activity. Demand still seems to be there but with still-elevated house prices and rising cost of debt, more buyers are feeling priced out of the market (again). As with the Beveridge Curve example, perhaps there’s room for home prices to move lower without impacting the so-called wealth effect (and, by extension, consumer sentiment) too much. Add that to the list of open questions.

Here’s a link to the Redfin article if you’d like more detail.

https://www.redfin.com/news/housing-market-update-surging-rates-slow-buying-and-selling/

What to make of all this? A lot of these questions about interest rates, the job market, housing, and recession are likely to carry over into next year. In the meantime I’ll be optimistic and say I’m in the soft-landing camp, although the realist in me is barking a bit. It can be hard to stay disciplined in the face of uncertainty, so don’t let your questions fester. We can discuss your situation and what, if anything, that you could or should be doing differently. Otherwise, it's steady-as-she-goes, as hard as that can be at times.

Have questions? Ask me. I can help.

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A Few Quick Notes

I had originally intended to wait until next week to return to these posts, but here are a few random bits of information in the meantime.

First, a quick business note. I’ve been having some email issues that have impacted my ability to send to Gmail users. If you’re one of them and have been wondering why I haven’t responded to a recent email, check your junk folder. I’m slightly ashamed of not fully understanding how the tech functions but am working with someone to resolve the problem.

Next, you’ve likely heard or read about how Jerome Powell, head of the Federal Reserve, gave a pretty stern speech last week about fighting inflation. A big part of Powell’s job with his speeches is managing our inflation expectations. Arguably, after waffling a bit in recent months, Chair Powell used his speech to double down on inflation being the Fed’s #1 job (they have two – the other is enabling a healthy labor market). He said clearly, “Without price stability, the economy doesn’t work for anyone”.

While I don’t think we can argue with that, the main question on the minds of investors is how high he and the rest of his committee will raise interest rates to get back to the increasingly mythical land of stable prices. And how much would they sacrifice job #2 for job #1. Fed officials have indicated potentially raising the benchmark rate they control by another 1% or so this year with more increases likely in 2023, on top of raising 2.25% already this year. Chair Powell hopes to engineer a so-called soft landing, bringing inflation down to manageable levels without triggering a recession. The main tools he has for this are his public comments and raising interest rates. Not an easy job.

As we’ve discussed before, rate increases are a blunt tool that take time, often quite a while, for their full impact to be felt. We’ve already had several larger increases in a handful of months. Investors worry that the Fed won’t get its soft landing, that continued aggressive rate increases will push the economy into recession and, perhaps, that the Fed has to keep chasing inflation for a lot longer than anticipated.

These fears were brought to the surface during Powell’s sub-ten-minute speech last Friday and major market indexes fell quickly. This carried over to yesterday but, at least as I write, futures markets are indicating a bit of a bounce. We’ll see how the day unfolds. As always, I mention all this to help keep you informed of major developments in the markets.

It’s an uncertain time for just about everyone in a variety of ways, but good planning helps. Markets have had a tough go so far this year, but every client plan I’ve worked on lately is holding up fine amid all the chaotic news and market declines. I can’t claim credit for this, although I’d like to. Instead, your financial situation, financial outlook, etc, is probably in good shape because you’ve saved well, you don’t overspend, and you don’t freak out and overreact when other investors do. The old saying is true – If it were easy, everyone would do it. It’s definitely not easy but you find a way. I hope I help you on that journey.

Along these lines, here’s a recent article from The Wall Street Journal about deciding to retire during tumultuous times. The article references the so-called 4% Rule. I’ve participated in trainings with the person who originally came up with the “rule” and would offer that its best used for back-of-the-envelope planning, a guideline, and no substitute for more detailed work. Let me know if you get stopped by the WSJ’s pay wall and I can email you the story from my account.

https://www.wsj.com/articles/when-best-and-worst-times-for-retirement-11661816598?mod=hp_lead_pos10

Finally, I may post something more detailed about this in the near future but check out this article from Morningstar on I Bonds.

These bonds are sort of a fluke caused by high inflation and you buy them directly from the US Treasury via its antiquated website. The “initial” interest rate is a whopping 9.62% because the rate is indexed to inflation and can reset every six months (the guaranteed rate is currently zero). If inflation stays high for a long time these bonds would keep pace with it (while the rest of your finances suffer). If inflation comes back to earth reasonably fast, say over the next year or so, your 9.62% will average out to something less. There are annual investment maximum’s of $10,000 per social security number. And I Bonds are meant as a long-term investment, but you can get to the money early by paying a penalty.

The bottom line is that these are good investments for someone with idle cash outside of retirement accounts and who can let that cash sit for at least a few years. Okay, enough from me. Here’s the link to the Morningstar article and to the Treasury Direct page that covers the high points of I Bonds.

https://www.morningstar.com/articles/1108067/run-dont-walk-for-i-bonds?utm_medium=referral&utm_campaign=linkshare&utm_source=link

https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm#irate

Have questions? Ask me. I can help.

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Death by Subscription

Initially I was going to post another blog about the markets since last week wasn’t great for investors. And after a brief respite we’re looking at another down day as I write this. The mood is still being driven by inflation, recession risk, and the Fed, with the latter expected to raise short-term interest rates by another 0.75% when they meet again this week.

But instead of all that, let’s discuss an article that piqued my interest because it addresses something I complain to my kids (now 16 and 20) about probably a little too often: what I call Death by Subscription.

What I’m talking about here is the insidious nature of the subscription and recurring payment model that’s become so popular. According to Gartner Research, all new software companies and at least 80% of existing companies, offer a credit card-based subscription service and recurring payment option of some kind. Many start with a freemium, or perhaps a trial period, before automatically hitting your credit card, usually every month, and often with no expiration date.

I’m not suggesting that automatic payments are a bad thing. On the contrary, they make my life a little easier by just happening versus me having to click a bunch of links and type out my credit card number or, heaven forbid, write and mail a check. But obviously we have to monitor this stuff and, unfortunately, this is only getting harder. So my problems with this are similar to what the article mentions, such as:

  • The average person has 12 recurring subscription arrangements. Millennials have 17.
  • Roughly 42% of us have forgotten about subscriptions and more than half of us underestimate our subscriptions by about $100 per month.
  • On average, people are letting about $133 per month, or around $1,600 per year, evaporate from their checking accounts via unused or simply forgotten subscriptions.

So I was curious how much money I might be wasting because of this. Interestingly, it actually takes some grunt work to figure out.

Years ago I switched around my personal and business finances to only deal with one credit union for general banking needs and just one credit card for day-to-day purchases. I keep my business accounts separate from personal and this doubles everything, but the important thing is that on a typical day I’m only interacting with two institutions, Redwood Credit Union and American Express. This makes looking at data like this a lot simpler, or at least it does in theory.

I found out quickly that neither company allows me to search for recurring purchases. With algorithms these days I’m sure they could, but they don’t. So to find out what’s recurring I had to manually search my transaction history and write them down.

With Redwood Credit Union I was able to whittle down all of 2021 and this year so far by looking at “debits” and then sorting by less or more than $100, but it was still a lot of transactions to review. After spending maybe 30 minutes doing this I hadn’t found anything unexpected or forgotten about, so that’s good.

American Express had more capability than RCU, as I would expect, but I was still surprised that they didn’t let me search for recurring transactions. I could keyword search for “Netflix”, to see all transactions specific to that company, but my goal wasn’t just to review what I think my current subscriptions are. I also wanted to see if I had forgotten anything. So, unfortunately I had to scroll again, this time through a 33-page document covering 2021 and then a running list for this year, but at least Amex grouped the data by category which made the process a little easier.

Here are my takeaways after an hour or so of fiddling –

  • It’s all too easy to lose track of recurring subscription payments, especially smaller dollar amounts. For example, I have three items each month for Apple on my Amex card. One is for Apple Music (that’s a keeper) but the other two are a little nebulous. I think my household doubled up for data storage that we don’t fully use. My iPhone lets me check subscriptions purchased through Apple, so I’ll have to give that a look.
  • Streaming services now resemble cable. Netflix, Hulu, and Disney+? That’s about $41 per month combined. Do we need all three? Reviewing this stuff is a reminder that we subscribed to Hulu mostly for one show and the binging is over, so we should cancel it. And we really don’t watch Disney+ that much but a family member lets us use their Prime account and they use our Disney+, so it’s sort of a trade. That’s probably too much information, but it’s one reason for our multiple streaming services. What’s yours?
  • Beware the annual auto-renewal as it’s very easy to miss when reviewing monthly or annual statements. For example, I found a subscription from last Fall that would have auto-renewed soon. Maybe I could have cancelled after the renewal and got my money back, but it’s much easier to figure it out ahead of time. I was also reminded of other annuals that I’m happy with and will let those renew after verifying the terms.

There are apps that help with this but, ironically, they’re auto-renew subscriptions too and, in theory, would only add to the problem if you don’t realize some value from them. Rocket Money is one that identifies and monitors your subscriptions. It’s free but requires payment for premium services, and I’m guessing subscription monitoring is one of those.

Some may say this is small stuff and not to sweat it and I get that, at least to some extent. But start adding these subscriptions up and we could be talking about a grand or two annually in real money that’s paying for unused products or services. I think that’s worth 10 minutes a day, Monday through Friday, to monitor your bank and credit card transactions, or at least a few times a year to review statements, don’t you?

Beyond that, this kind of review is part of taking more control of your finances. If you’re spending money, make sure you know what you’re getting in return. Don’t just let it happen. Good luck as you geek out on reviewing your subscriptions. It may be enlightening while also putting some cash back into your checking account. What to do with the money you’ve saved? Buy some stocks and bonds. You may have heard they’re on sale lately.

Here's a link to the CNBC article if you’d like to read more.

https://www.cnbc.com/2022/09/06/consumers-underestimate-monthly-subscription-costs-by-at-least-100.html

Have questions? Ask me. I can help.

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We Would Never...

A couple weeks ago I participated in yet another financial industry discussion about email fraud. The pandemic created huge opportunities for fraudsters of all types, but email fraud like spoofing, phishing, spearfishing, and ransomware are still on the rise. While much of the information was similar to prior talks on the subject, the main difference was just how good the crooks are and how targeted they can be.

Email is still an excellent way to communicate and do business, we all just need to be more careful. One of the recommendations was that financial firms like mine write up a “We Would Never…” list, detailing what we won’t do, won’t ask for, when communicating with you via email. That way you’ll know any email is probably fake if it’s asking you for this stuff. Here’s our list and, as always, feel free to ask questions.

We Would Never…

Ask for your personal information, such as your passwords or full social security number, via email. This should be pretty obvious, but we still get folks who type out their full social in an email. The last four is fine, but not more than that. Although some email providers have high levels of security, from a practical standpoint it’s best to think of your email account as being wide open. Imagine each of your emails being viewed by a third party – do you want them to see what you’ve typed? Assuming the answer is no, pick up the phone and provide it verbally or ask for a secure link to transmit the information.

Accept instructions to link your investment account to an outside account, such as your bank or credit union, without verbally verifying with you first. Moving money electronically via the ACH system is pretty straightforward, quick, and free. We can set this up with a handful of datapoints and then the instructions are ready to use within a couple of days, either by you or most often by us. We gather the required information directly from you, usually via phone, and then prefill a form that you’re required to e-sign (the e-signature happens after the system verifies your identity). If you emailed all this to us, especially if I wasn’t expecting it based on prior conversations, we would verbally verify with you before acting.

Send money to 3rd parties on your behalf without your verbal and written authorization. We can easily send money to family members, charities, or others if you authorize it. But this is where things get interesting from a fraud perspective. Fraudsters can break into your email and patiently watch for money in motion. Maybe it’s a home in escrow, setting up ACH instructions, or sending a wire. The crook jumps into the email exchange and inserts their own instructions, hoping that sloppy procedures on either side won’t catch the change before money is sent to the fraudulent recipient.

Send you emails with our names misspelled. On very rare occasions we might slip and send you an email from our personal email address. Otherwise, emails from us are coming from brandon@, brayden@, service@, or info@ “ridgeviewfp.com”. I put the latter part in quotes because that’s our domain name and fraudsters, especially in the example above, will spoof an email address by creating a new one and slightly misspelling the domain name so that it seems legitimate at a cursory glance. They’ll even name the fraudulent email account so that it shows up as “Brandon” in your inbox. The way round this is to hover your mouse or finger over the sender name to see the sender’s actual email address. If the email seems to be from us but the address is misspelled, it’s fake. Don’t click a link or respond. Instead, forward the email to us and consider notifying your email provider. An additional step is notifying the FBI’s Internet Crime Complaint Center: https://www.ic3.gov/Home/ComplaintChoice.

Make detailed requests or send you links via text message. Texting may be more secure than email, but all of our emails are archived, and similar technology isn’t quite there yet with text messages, or at least not in my industry. In the meantime I’m happy to send basic information via text, but that’s all.

Those are some of the things we won’t do. Here’s some of what we definitely will do.

Take some instructions via email to make your life a little easier. If we’ve worked together to set up links to your bank or credit union, we’ll often take instructions from you via email to use those links to move money on your behalf. These are inside-the-box versus outside-the-box requests. In other words, email is okay if you’re asking us to do something we’re already aware of or that seems within character. I still worry about this, so we’ll call from time to time to verbally verify the instructions just to be safe.

Provide secure links to transmit information. We usually include links in an email to send documents to us via our encrypted cloud server. The links go to this page on our website https://ridgeviewfp.sharefile.com/share/getinfo/r715b255e9dd4afaa. You can bookmark this page or ask us for fresh links whenever needed.

Store your information in encrypted, two-factor password-protected cloud folders. This keeps your data safe and accessible by us from anywhere. Encryption also keeps your information 100% private, except for situations involving a court order.

Keep our tech up to date. This is an ongoing challenge, especially for someone like me who is a tech user and not an all-knowing expert. Take my note from last week as an example. I found out that my email system needed updating and ultimately hired an expert to do so. We’re taking the opportunity to add new anti-phishing and spoofing, and anti-ransomware monitoring services as well. My emails might still be going to your junk folder, so look there if you’re expecting anything from me. That problem should be resolved very soon.

The bottom line is we can do a lot to protect your information and the money we manage for you, but we need your help. Please be extra vigilant when working with email. Does the email seem legitimate? Is the sender asking appropriate questions? Do instructions seeming to come from us make sense? When in doubt simply pick up the phone and verify.

Have questions? Ask me. I can help.

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A Summer Break

I hope your summer has been going well so far. We’re now well into the second half of another eventful year and I realize I haven’t taken a break from writing my blog yet. I try to do so twice each year, once in winter and again during summer, to spend a little more time with family.

Even though these posts will pause for a bit I’m still hard at work, so feel free to reach out with any questions or concerns. Otherwise, I’ll be back to these pages soon, likely with news about new planning software I’ve been reviewing. This new tech lets us test a client’s income plan against relevant historical time periods, such as bouts of high inflation, world wars, market crashes, all that fun stuff. Should be interesting and valuable as a stress-testing tool.

Have a great rest of your summer!

- Brandon

Have questions? Ask me. I can help.

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