A Quarterly Reflection

In place of our Weekly Reflection, we are sharing the Quarterly Reflection that we publish at the end of each quarter. It is a little longer read (7 minutes!) with a spotlight shown on the economics, markets and financial planning topics of the current time. Please share your feedback, thoughts and questions by clicking here.

On the Economy

No one likes to hear words like “since 2008” given what a rotten time that was in the world, economically speaking. (Warning, those words do appear again the Markets section.) Without the same intensity of 2008, some of today’s trends remind one of the oughts.

Take the ISM data – this is the Institute for Supply Management which reports on manufacturing and service business data. For the first time since the Great Financial

Recession, all ten of the manufacturing survey’s metrics are contracting. The downturn started in June 2022 but it is picking up speed to the downside.

Services, which is a much bigger part of our economy now than manufacturing, is also sputtering a bit in its most recent data. The ISM says while services are “generally expanding” they are doing so with much less enthusiasm.

Taken together, the manufacturing and service numbers indicate demand for goods and services is subsiding. This is a good preview of slowing inflation, especially in the type of the inflation data that the Federal Reserve watches, the Personal Consumption Expenditures (PCE) index. All are rooting for this metric to return to 2% annually. As of the end of February, core PCE, the calculation that excludes food and energy, was trending at 4.6% annual inflation.

Speaking of energy, which often is found with the word “volatile” in front of it, is again volatile. OPEC+ surprised markets last week with plans to cut production. Supply and demand had been more or less in a happy balance before the announcement, even given the stresses of the war in Ukraine. In the immediate aftermath of the news, crude oil and pump prices popped before the worst fears were waved off. After all, there is a silver lining in a slowing economy that many will not be consuming as much.

Also coming into balance is employment. The job market has been remarkably strong and resilient even as Federal Chairman Powell laments that it needs a cold shower and he is doggedly dousing it with higher interest rates. His mandate is for 4% unemployment in order to keep slack in the job market and make a 2% inflation goal easier to attain.

Today there are 1.67 job openings for every employable person, still historically high but down from nearly two last year. Happily, equality is better; the gap between white and Black employment rates is closing. Wages are still growing but not at the same breakneck speed. Overall unemployment remains statistically very low at 3.5%, even as sectors like technology, finance (even before Silicon Valley Bank dominated headlines), and now healthcare and retail are trimming head counts, citing belt-tightening to prepare for tougher economic times.

Finally, for now, there is this debt ceiling issue to contend with that will have a major dampening effect on the economy if not negotiated properly. The government has met its $31 trillion borrowing limit and yet needs more money to keep the wheels greased and paying for existing authorized programs, not new ones. Congress has permitted itself more borrowing permission nearly 80 times in the last 80 years. The Democrats would like a “clean” increase; the Republicans would like some concessions on spending before raising the ceiling. Thus, the hold up. What we do not want is a 2011 repeat, when a last-minute deal to raise that debt limit came too close to default for anyone’s comfort. Confidence was sorely shaken; U.S. Treasury debt was downgraded and the S&P 500 fell 16% in three weeks during the summer of 2011, recovering six months or so later. To date an actual default has been unthinkable but complacency is irresponsible, for investors and for Congress.

As we barrel from one fussy and worrisome headline to the next, the evidence that the economy is cooling is clear. The Fed is unlikely to raise rates significantly for the rest of the year. Our economy is likely tipping into recession. At present time it does look dreadful, but like a necessary and uncomfortable reset to clean up excesses exacerbated over the last three years of pandemic-induced madness.

On the Markets

The last three months was a whiplash period for investors. Stocks took off quickly in January then fell sharply from February into mid-March before working on a comeback. Turmoil in finance related equities, kicked off by the shocking Silicon Valley Bank (SVB) and Signature Bank collapses, led to double-digit drops in large and regional banks. These losses were off-set by rising technology and similar growth stocks that were buoyed by perverse hope that any banking issues might push the Fed to pause or even reverse interest rate hikes this year.

As we now know, the Federal Reserve voted to raise rates by 0.25% in March, making clear that the inflation fight remains the priority, even though higher interest rates could exacerbate a liquidity crisis. Per new reports from those mid-March days, the Fed postponed a formal decision on whether to raise rates for as long as possible awaiting news of if, or how, further problems would arise with additional bank failures.

Markets hit a low point for the year on March 13th, right as SVB and Signature were shuttered, before moving higher with impressive confidence. This is particularly true for the NASDAQ, which has entered a new bull market phase, rallying double digits from December lows. Most of this new enthusiasm comes as traders bet that on the central bank cutting rates later this year. Still, all three major indices remain well below their high-water marks set in November 2021. Sixteen months later, the NASDAQ is still the farthest below its high by some 24%. The Dow is down 8% and S&P 500 down 15%.

But with a market forecast that appears a bit cloudy, investors have been taking a harder look at safety plays. Gold, which was unloved as the market faltered in 2022, is making a run toward $2,000 per troy ounce. Billions of dollars have flowed into gold-focused funds and mining companies, propelled by recession fears and the global banking struggles. Interestingly, this century has seen gold prices increase in the years following periods of rate hikes, so perhaps that has something to do with the shine of this trade. (On an inflation adjusted basis, gold is not as expensive as it was in the 1980s or 2008-9 financial crisis, even as headlines are screaming about all-time highs.)

The bond market, in a bout of volatility not seen since 2008, ended in the green this quarter after a dismal 2022 for prices. And depending on what type of investor you are, you may not be too worried about what will happen next. Here's why - there are two types of investors that use the bond market. There is the long-term investor who is looking for diversification and income. What happens in a quarter, or even over a year or longer is not important as long as the bond holder is receiving a regular coupon payment and is confident they will get their money back at the end of a security’s term. Yields that approached 4% for a 10-year U.S. Treasury this year were too much to resist and investors jumped at the opportunity, delighted to be getting a decent return after a decade or so of barely-there interest. Also, there was the feeling that it might not get any better from here if the Fed stops raising rates. Then there is the bond trader who wants to buy low and sell high by accurately parsing the comments from the Federal Reserve Board and thousands of other market indicators to determine policy and economic momentum. The trader cares massively about where things go next and caused much of the wave of volatility this quarter.

Regarding interest rates, the history is mixed as to whether an end to hikes or to the other policy the Fed is undertaking, quantitative tightening, will be enough to get markets back on a long-term cheerier trajectory. At the moment, stocks, bonds and gold are signaling that they believe rates will be dropping soon and it will be good for their immediate bottom lines. Markets are more complicated than such a simple equation but in the short run, these assets are signaling with higher prices that they are not buying the Federal Reserve's line on "higher rates for higher".

Ultimately it will be earnings reporting season that will help investors decide if they can continue on a path of confidence or not. If not, we could retest some recent low prices. Fourth quarter earnings, reported in January and February of this year, were down 3.2% overall. First quarter earnings are already expected and pricing in a decline of 4.5%. Most important in the upcoming reports will be outlooks on the rest of the year. As markets are always looking ahead, the end of this year and 2024 look to be more profitable, so investors

may be willing to ignore a tough start to 2023 earnings if those clouds are still forecast to part, even a little.

On Personal Finance

Bank failures like the collapse of Silicon Valley Bank are nerve-wracking to everyone. Given how rare bank failures are, it is not an everyday worry but they do happen more often when the economy is going through contractions. Between 2008 and 2014 there were 507 failures, an average of 72 a year. There have been less than three a year on average since then.

The Federal Deposit Insurance Corporation (FDIC), established by Congress in 1933, is designed to help protect the assets of the average depositor in these cases. The bank pays the insurance premium, gets the gold plate announcing their membership and the customer rests easier. And by assuring Americans that their money isinsured, the classic bank run should be a thing of the past.

The FDIC officially covers up to $250,000 in deposits in checking and savings accounts (whether or not you earn interest), money market deposit accounts and bank CDs. For those with more dough than that, there are many easy and smart ways to get more, or all, of your bank savings FDIC-protected.

The deposit coverage limit is per bank, per depositor and per “ownership category.” An ownership category is based on how your account is titled, such as individually or jointly owned. You might also have a trust account, corporation or a retirement account. These can all be at the same or different bank.

For example, Mr Blank is an individual with $500,000 split between two separate savings accounts at two different banks; his entire $500,000 should be fully covered. However, if he has $500,000 split between checking and savings accounts at the same bank, his coverage will only be $250,000.

One way to boost coverage limits without juggling multiple bank relationships is to look at the ownership categories. A savings account in Mr Blank's name plus a jointly-titled savings account shared with his spouse will be covered up to $750,000 in cash. Because the FDIC regards joint accounts as being in a different “ownership category” from single accounts, it therefore provides insurance up to $250,000 per depositor per unique registration.

A handy tool to use is the FDIC’s Electronic Deposit Insurance Estimator. Enter your information to determine how much coverage you may have.

There is insurance on other investable assets as well, called Securities Investor Protection Corporation (SIPC), which covers losses associated with a brokerage failure. Stocks, bonds, exchange and mutual funds, money market mutual funds and brokered CDs are examples of securities that are covered up to $500,000 by SIPC. Of that $500,000, SIPC includes a $250,000 maximum coverage for cash. Market losses are not covered, just any losses associated with the demise of the brokerage institution holding your securities are covered. Similar to FDIC coverage, ownership category matters.

At Serene Point Advisors, we are keenly aware of the insurance coverages, limits and risks. Please do not hesitate to give us a call if you would like to discuss your personal situation on this matter. We will be delighted to discuss.