What’s going to happen in the future? I really don’t know. But I can make a guess.
While no one has a crystal ball -- that works -- there are certain scientific laws and actions that we can identify or use to predict a potential reaction.
In the world of Investments, the market has never gone up forever without an occasional downturn. So, with all the possible market mayhem that can happen with a recession, I am optimistically inclined to believe all with be eventually better. It’s what happens in the meantime that is the question.
Prepare for the Worst, Hope for the Best.
At the writing of this blog, the market has steadily increased more than 28% in a little more than five months (Oct 28, 2023 to Apr 1, 2024). During the past two weeks it is now down over 5%.
Part of the fabulous uptrend in the market has been due to market opinionmakers who have priced their optimistic expectations that interest rates were going to come down several times this year if inflation was able to get under control. The longer they talked about it, and were bullish, the more the market went up.
On March 7th, Congress was warned “there will be bank failures” caused by Commercial Real Estate losses. That is according to Federal Reserve Chairman Jerome Powell’s testimony to the Committee on Banking. He stressed the Fed was not worried about the “very large banks”, but his concern was with the “smaller and medium-sized” banks. Then, he said he believes the interest rates may come down sooner than later.
Meanwhile, Chairman Powell has been very cautious suggesting how the interest rates will decrease. While trying to stay positive, the word from the various Federal Reserve Governors have usually agreed that inflation must reach 2% before they would vote to decrease the interest rate. But they have not talked about the possible negative reason: Decreasing Interest rates are one of their only weapons to counteract a plummeting market during a recession.
Since 1955, nine of the past thirteen significant interest rate declines have occurred during or at the end of a recession, seeming to suggest the Fed has desired to keep their powder dry, keeping enough in stock to make a substantial difference, helping stem off a downward financial drop by boosting the economy.
So, when Chairman Powell said in last month’s meeting the Fed is “not far” from the point of cutting interest rates, it seems he knows something that he’s not willing to divulge. That may specifically mean there’s going to be a good reason to cut the rates.
This is why there is a growing camp of financial advisors that believes there is a 98% chance of a coming recession. In last year’s blog, “Finding the ‘Just-Right’ Bandwagon” (May 18, 2023), we detailed how the yield curve inversion of the10 year Treasury Bond rate minus the 2-year rate was pointing to a potential recession. It still does and hasn’t improved.
A year earlier, CNBC Chief Economist, Steve Liesman, reported on March 31, 2022: “When the curve inverts… there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years… according to Bespoke Investment Group.”
If I’m wrong, there’s a 2% chance we will be surprised as the market continues its upward bull trend. But it seems like we’re closer to the 98% chance of a recession.
Learn From History
Many years ago, I decided to follow the adage, “If you are prepared, you shall not fear.” I’ve learned that has helped me avoid a lot of unnecessary anxiety.
It was Twenty years ago, Allan Greenspan, Chairman of the Federal Reserve Board, warned:
"If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful." (Federal Reserve Board Annual meeting held at Jackson Hole, Wyoming, August 27, 2004.)
In my opinion, things haven’t gotten better.
Today, Congress has still not fixed key parts of the problem, such as Medicare and Social Security insolvency, our increasing national debt, expected commercial real estate losses and failing banks, geopolitical issues, and more.
Whatever happens over time, I am convinced the market will continue to go back up, even if it takes six to ten years. That’s what it’s done since the New York Stock Exchange was founded more than 230 years ago, in 1792.
Following the first recession of the new millennium which lasted 18 months from 2002 to 2003, Alan Greenspan predicted the U.S. economy was poised for a rebound to last for a few years. Which it did till October 2007. However, he said risks remained as the country continued to be “buffeted by strong cross currents”. He was “cautiously optimistic” about the short term. But, if hard decisions are not made soon, he said, we will face “abrupt and painful” adjustments.
Currently, market watchers have been waiting for the stock market to repeat the frantic growth of the 1990s when the world invents another economic powerhouse. It appears it may have done that with Artificial Intelligence (AI). But many warn that AI is still in its infancy.
Here are two quick examples of how life has been changed by modern industry. In the late 1920s the automobile industry helped drive the stock market up before it finally crashed into the Great Depression. In the 1990s the computer and internet industries electrified the market. Still, that did not stop the 2002-2003 recession and then the 2007-2009 “Great Recession”, leaving the first decade of the new millennium to languish in zero growth.
The Retirement Rush
While the market has doubled since 2014, the problem is that it has been on the back of the AI anticipation and the nearly zero to one or two percent Federal rates. Higher interest rates are required to offset the ten-year trend line which is far below the norm. This is a perfect example of a short-term expanding market, quickly moving upwards at the risk of negatively affecting medium to long-term growth.
The depth of the financial downturns of the future will have their own cause, whether it’s increasing taxes to offset our skyrocketing federal and state debt, or the insolvency of the Medicare and Social Security system. Then there’s the geopolitical issues around the globe. These and other unsolved problems all affecting either inflation, stagflation, or deflation.
One of the greatest concerns is that a large number of Americans have not saved enough for retirement. There is worry that Baby Boomers are still borrowing more and saving less than ever before. The average household credit card balance is so huge that it could take up to two decades to pay off at current levels.
Nasdaq, in its Retirement Outlook 2024 reports: “Less than half of Boomers have adequate Savings…. Forty-three percent of 55 to 64-year-olds had no retirement savings at all in 2022, according to the Federal Reserve Board.” (January 12, 2024)
Even though this financial time bomb continues ticking, as long as you know where to go for protection there is no reason to fear the eventual outcome. Americans are too resilient to allow such a challenge to get in the way of their long-term happiness. Yet this does not mean tomorrow’s test will not be a trial!
So, this is my challenge to you:
- Make the commitment that your savings will never be squandered for temporary amusement at the risk of your future comfort and lifestyle. Unless needed for your essential living expenses, be cautious to never spend money you may need tomorrow.
- Learn to control your spending habits.
- Start today. Do not wait any longer.
If you have not been saving, it is not too late, as long as you begin now.
How to Start Saving For Your Trip
Often, I hear clients say, “I need to save money for retirement,” or, “I need more money so I can enjoy my retirement.”
Not sure what their goals are, I ask, “What do you want and how much money do you need?”
“Oh, I don’t know,” is the uncertain reply, “About what I am living on now.”
This type of conversation is much like a wanna-be-tourist going to a travel agent and saying, “Send me someplace nice or fun. I don’t know where I want to go or what I want to do.”
For this reason, investment advisors end up being a lot like travel agents. Good agents and advisors are going to communicate rather than dictate. They are going to ask what you like and probe into your preferences and budget.
Here is a simple approach I use to help my clients identify the right destination and the most appropriate vehicle to get there. As a disclaimer, these examples are not perfect, and there are many variables that enter the picture, but I think you will get the idea.
First, to advise you about your retirement, I need to know where you want to go and how soon you want to leave. Second, how fast do you want to get there? And then, once you arrive, what do you want to do and how long do you want to stay there?
For example, it is important for me to know whether you want to travel to Alaska or Hawaii. Your ultimate destination will affect your lifestyle and activities, as well as how you get there. I will need to know whether your trip is going to be a short or long vacation. (You would want your money in liquid or “non-qualified” accounts such as regular bank, annuity or brokerage accounts). If you want to go there for an extended period, say for retirement, you will treat your budget differently. (This would be frozen or “qualified” accounts like IRAs, 401(k)s, TSAs, 403(b)s, etc.).
If you want to go to Alaska, I have five general ways for you to get there. We can send you by a jumbo jet or charter airline. Both are fast, but still have drawbacks and risks. (This mode of transportation is similar to securities – individual stocks and bonds, mutual funds or variable annuities). I could recommend a cruise ship (compare to variable annuities with guaranteed riders) or a train ride (like a fixed annuity). Cruises and trains are usually safer, but they take longer and are harder to get off before the destination. (For that matter you don’t want to take a walk outside of your airliner at thirty thousand feet – hence, you can see this isn’t a perfect analogy, but the basic concept still makes sense.) A bus tour may take longer and will not have the accommodations. In the long run you might spend more money because you may have to stop and eat and sleep on the way, but again, you don’t have to worry about some of the other risks. You put your faith in the driver and expect everything to be fine. (Associate the bus with a bank certificate of deposit). Finally, you could drive your own vehicle (relate this with savings accounts). You may have more flexibility, because you can stop anytime along the way, but there are a number of other factors to take into consideration, such as the wear and tear on your vehicle, including the extra money for meals and lodging, and other expenses.
So, after all this discussion, you still want to go to Hawaii? Well, that changes things. You have to save a little more money, and in addition, you better not be afraid of flying or ocean liners, because you cannot take the train, bus, or car.
Get the picture?
No matter what your ultimate goal, when it comes to your financial future, my advice is: Save! Save! Save! And do it now! But don’t make it hard. Saving can be as enjoyable as when you set aside some extra money for vacation. Consider every dime you put away today will add up to help your enjoyment in the future. Reconsider anything unnecessary. Do you really need that extra cup of coffee, can of soda, or candy bar? Within ten years, five dollars a day can add up to thousands of dollars, not to mention saving a lot of calories!
Invest For The Best.
Looking back to the 1930s, many smart investors wisely positioned their money for success. Rather than losing a major portion of their portfolio by riding out the storm, they moved their money into safe havens, and prepared their assets to buy into solid investments when the market appeared to bottom out.
While millions were going broke during the Great Depression, some “lucky” investors became rich as they took advantage of Dr. Robert Goodman’s formula:
Crisis + Change = Opportunity
“How should investors interpret crises in financial markets? History shows that crisis leads to change and change produces opportunity. By keeping these past events in mind, investors can learn to use the opportunities when turmoil occurs.
‘In each of these crises, the media and public perception foretold doom, but each problem was ultimately resolved by unexpected government action. In the same way, world governments will do whatever it takes to remedy the current international problems.… Make no mistake, it might take a long time, and some companies will fail, but economies will not be left in ruin.’"[i]
Those planning on a comfortable retirement must keep sight of their long-term perspectives and invest in those organizations that will weather the storm. By identifying the right companies, advisors say, investors can come out ahead in the end.
That is easy to say, if you are aware of your choices.
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In my next blog post, I will give you a market update and share some of the options investment you may have, and why we make those recommendations.
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[i] Goodman, Dr.Robert, Putnam Mutual Funds, Senior Economic Advisor, Retired, literature.putnam.com/literature/pdf/II560.pdf
Disclaimer: The views and opinions expressed are based on current economic and market conditions and are subject to change. There is no guarantee that any statements of future expectations will come to fruition. All information presented is collected from sources believed to be reliable, but may not be guaranteed. It is meant to provide general education and should not be considered investment advice, or a recommendation to take a particular course of action. Past performance does not guarantee future results and investing during any market cycle poses risks including the loss of principal.