Quarterly Reflections - April 2018

In the spring I have counted one hundred and thirty-six different kinds of weather inside of four-and-twenty hours. ~ Mark Twain, speech delivered in New York City, Dec. 22, 1876.

Like opening the door on a spring morning to find that it is suddenly much colder than you expected, the markets are suddenly much more volatile, racing up and down, sometimes within one trading session. It’s not a complete surprise – we knew those nice days of reassuring stock market returns were a season that would not last, but it still makes us shiver.

On the economy

It is hard to find fault with the top line figures. Macro-economic conditions continue to be favorable. Corporate profits reported last quarter were up 15% on average and GDP numbers look healthy. Employment is a bright spot in most areas of the country and in many sectors. Robots have not managed to dominate every interview and baby boomers are stepping away from their desks to make room for other generations. Growing wages are a relief for millions who have not seen meaningful income increases since the great recession. Confidence surveys, albeit a softer measure of future conditions, continue to show the American family is feeling upbeat about their own personal futures.

Investors have found fault with inflation numbers. Inflation concerns contributed heavily to February’s panicky market sell-off with stock and bond investors alike cashing in. Economists, and Federal Reserve Chairman Jay Powell, ticked off the domino effects from wage growth pushing up inflation, and thus providing evidence for more interest rate hikes by the Fed, which the markets decidedly did not like.

Taking the longer view, inflation has been stable with 3.8% being the highest annualized reading (in 2008) since 1992. One can read the current data as painstakingly as possible and still find no certain answer to when, where, or by how much inflation may rise. In the near-term, it may continue along in a “very low” to “low” range, say 2.2% - 3.0%.

Some economists point to our aging demographics as one reason why such low inflation persists. Per Stanley Fischer of the Fed “an increase in the average age of the population is likely pushing up household saving in the US economy.” So we are not spending enough. Also, our connected globe also makes it very easy, relatively speaking, to shift production of our clothes, our cars, and even our food, to countries and regions with more favorable expenses. Easier still is standing in a retail store of any kind on any corner and checking the sticker price with the same product available online; that behavior alone keeps prices competitive.

On the markets

So often when January markets return gains, we read the well-worn adage “so goes January, so goes the year”. For January, the S&P 500 returned 5.6% and other major indices were easily up in the same range. The returns certainly caught the attention of plenty of investors because the markets were flooded with a record amount of new money in January. Yes, you read that correctly. Over $50 billion dollars was added to stocks via mutual funds and exchange-traded funds at market highs. Yet February did not go as January, and neither did March. The major stock, and bond, indices wrapped up the first quarter with losses.

Inflation fears stoked the fire in February but the real fuel was a general belief that all was too good to be true. In fact, nearly as fast as we saw a new high in prices, the market fell into a 10% correction and has reached that multiple times as of early April. Investors responded by pulling $40 billion from the markets since mid-March. There is no way to know if they are the same spunky investors who poured in at the beginning of the year, but surely some are the same.

Against this backdrop, the Fed is finally addressing its $4.5 trillion balance sheet and discontinuing Quantitative Easing, the bond-buying program designed to inject funds into our ailing economy. After buying bonds for years the Fed stopped new purchases in 2014. It continued to reinvest proceeds from interest and maturities but then late last year, it stopped reinvesting and opted to let securities mature. How disruptive the “un-easing” period will be remains to be seen. So far, the money removed from the system relative to the balance sheet has been small, but it will grow. Anytime liquidity is removed, either by increased costs of doing business (higher interest rates) or less money available to spread around, the sister component is going to be volatility.

While the markets may have blown off plenty of newsworthy events over the last two years, it seems unwilling to let much go unnoticed now. It is wise to embrace the change and see that this is healthy and normal. It is good to see investors digesting data, determining its fundamental impact to a business, and pricing investments accordingly.

On personal finance

Social Security is one the most important social programs in our country. Defined as a poverty prevention program, it started paying monthly benefits in 1940 to those 65 years old or better. This was a time when the average life expectancy was only 61. Now we can initiate benefits at age 62, our life expectancy average is 85 and for most, Social Security plays a big role in planning for retirement. So it is important to consider the latest report from the Social Security Board of Trustees, which again warned of serious risks to the health of the program.

In 2022, a mere four years from today, benefits paid out will exceed revenue generated. By 2034 the program will have exhausted all of its reserves and will only have current revenue to pay beneficiaries. Payments to all could be reduced by an estimated 23%. We have long expected – and planned for in our retirement discussions – a decrease in benefits, but with an expectation that anyone born before roughly 1955 would not see reductions. That may no longer be the case if nothing is done.

It is our true pleasure to help with your investments and finances and we thank you!

DISCLOSURE

Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.

Investment Advisory Services offered through Integrated Advisors Network LLC (IAN), a Registered Investment Advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

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