A Quarterly Reflection

Serene Point
Jan 12, 2024
10 min read

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

With a new year comes renewed optimism, at home and abroad. The world turned out to have been resilient in the face of many obstacles in 2023. Longtime market researcher Dr. Ed Yardeni has already dubbed this another “Roaring 20s” era of prosperity. The first Roaring 1920s had just emerged The Great War and the “Spanish Flu” pandemic that killed some 65 million people between the two events. There was an explosion of many new technological, fashion and financials advances. Cars, telephones, in-home electricity and radios reached the masses. In the U.S., women could now vote and wore trousers. Everyone went to the movies. There was also inflation, high interest rates and borrowing was big business – the ability to use credit was expanded and payday loans, called “small loans”, became common. Let’s not forget margin loans, widely credited as a major cause of the 1929 stock market crash. In 1920s an investor only had to put 10% down for a stock investment and could borrow the rest, leading to risk-taking that proved catastrophic.

Check the box on the pandemic, the wars (still ongoing and although none of them have been labeled “world” or “great”, the world is following these great tragedies and their global impacts), and technological advancements, most notably artificial intelligence. Our financial system is much different today with many safeguards to avoid similar 1920s excesses; however, Buy Now Pay Later is a widely popular way to defer paying for items today and millions of investors still use, and pay high interest rates on credit cards and margin trading accounts.

We will not know for many years how much these two decades, separated by a century, will rhyme. Today’s economic landscape is experiencing a complex interplay of factors and events and it is too soon to call this a new bull market. This also may end up looking more like the 1930s. The World Bank reports that global growth is so slow and fragile that the world is the brink of recession due to higher than normal inflation, high interest rates designed to contain that inflation, the resulting reduced global investment and havoc caused by Russia’s invasion of Ukraine.

The U.S. is expected to fare a little better than other countries in the coming years. Manufacturing, some 8% of the U.S. economy, has contracted for the12th consecutive month while services, a much larger contributor to our economy, expanded for the 11th straight month. Services has been a key driver behind ongoing wage inflation and labor market tightness. While unemployment is 3.7%, well below the Federal Reserve’s target of 4%, there are small signs that it might be a little harder to land the dream job and the dream salary in the coming year; workers are seeing their hours cut, job openings are tougher to find and wage growth has been slowing. This will help with inflation, which is now about 3.2 to 3.5%, depending on which measuring stick is used. Many experts think this might be the new floor in inflation. The Federal Reserve would much prefer a ceiling of 2% and remains insistent on getting there.

Even if the personal consumer is not showing big signs of distress, other than upticks in auto and credit card delinquencies, the business side of things is looking a little scruffier. Banks continue to grapple with multiple challenges including the two-year decline in security prices on their bond holdings and losing deposits to higher-yielding money market funds. Refinancing and new loans are in a slump. Banks with large portfolios in real estate are dealing with a record-level of office vacancy, putting further pressure on their revenues.

Corporate bankruptcies hit 591 businesses in 2023, second only to 2020. Bed, Bath & Beyond, a stock market darling despite its well-known woes, finally threw in the towel (ahem) as did other popular businesses WeWork, RiteAid, Smile Direct Club and Yellow Trucking Company. Edward Altman, a bankruptcy expert at New York University says there is more to come. Zombie companies, those who do not have enough revenue to pay even just the interest on their debt, are growing in number. Some 10% of publicly traded companies in the world's 20 largest economies are zombies. Banks are loathe to extend more credit to these businesses, so many are numbered.

In all the continued pandemic recovery is still a work in progress. A severe recession seems unlikely in this economic setting, but a delicate balancing act must continue, here and around the world.

On the Markets

What a difference the last two months made for 2023’s total performance returns. Our market discussion last quarter focused on the unloved bond market, given the low prices and high yields while the massive issuance of new government debt was being met with global disinterest. The U.S. Treasury was trying to sell ice to the Eskimos who were insistent that they did not need any more ice. It was a tricky period.

But then the Federal Reserve suggested that rate hikes might be just about over and suddenly those icy bonds looked appealing. Buyers snapped them up, driving up prices, which have an inverse relationship with yields, thus driving down yields. The 10-year U.S. Treasury bond, the most commonly cited benchmark, ended the year yielding 3.88%, precisely where the yield sat at the end of December 2022. What a strange circular trip. After losing in 2021 and 2022, bond prices eked out gains for 2023.

The Fed talk on reducing rates also did nice things for the U.S. stock market. Equities rose for the last two months of the year, helping index averages nearly get back to “even” from where prices were in late 2021. Like bonds, the S&P 500, Dow Jones and Nasdaq are nearly complete on their long(er) strange trip which means, in this case, getting back to their all-time highs.

European stock indices also advanced double-digits in 2023. With similar background economic conditions to the U.S., equities rebounded from poor performance in 2022, despite continued high interest rates and inflation. In Asia, Japan’s Nikkei 225 Index was the best performer in 2023, closing in on highs not reached since 1989. A weaker yen has helped Japanese companies compete globally, making their products more attractive overseas, and foreign investments in the country helped.

This year punctuated how difficult investing has been in the pandemic era and how inaccurate forecasting has been on nearly every aspect of investing. For millions, just staying in cash is the answer. Per the Investment Company Institute, $2.3 trillion is in money market funds and more poured in over the last quarter, just as bonds and stock prices were going up. Although these funds are paying high yields, they will fall as the Fed starts cutting rates.

In other news, cryptocurrencies had a great year. While the parade of initialed Bitcoin pioneers like SBF (Sam Bankman-Fried) of the crypto-currency exchange FTX and CZ (Changpeng Zhao) of Binance contemplate life behind bars for fraud, billions of dollars are gone and more than a few people have lost their life savings, having believed wholly in the power of cryptocurrency, and apparently very little in the philosophy of diversification. For those who could and did hold on, Bitcoin nearly tripled in price this year, chasing its November 2021 high of over $67,000. The legal crackdown and attention on the industry have given confidence and returned optimism to investors. Appeal is widening as the SEC considers whether to allow Exchange-Traded Funds (ETFs) to trade based on the price of Bitcoin. Notably, ARK, Grayscale and Blackrock have funds in the works. A decision from the SEC will be announced later this month.

The housing market is eager for a recovery. If you think housing prices are high now, just wait until interest rates come down - at least that is what agents are warning to eager buyers. A recovery could flow over into a boost for related goods like appliances, furniture, and fixtures.

Overall, corporate cash flow is at record highs of over $3 trillion in the 3rd quarter alone and expected similar numbers in the 4th quarter. Despite high labor costs and interest rates, cash flow has been rising some 4.1% annually. Credit the pricing power companies felt they have had with relatively little pushback. (One known exception is Carrefour, a French grocery company that controls thousands of individual stores in 30 countries. It has said “non” to Pepsi, pulling products like Doritos and Pepsi sodas, because the prices are too high.)

Bucking the “up” trend was oil prices, which peaked in late September, notably before the Hamas-Israel war erupted on October 7th. They have been drifting lower ever since, and positively impacting inflation, which is heavily influenced by oil prices. Credit goes to U.S. production, now the highest of any country ever, and softening demand. Europe has been happily slurpingup the excess U.S. supply after cutting the pipelines with Russia. Although OPEC has been reducing production, and plans further curbs this quarter, not all members adhere to the mandates and often increase pumping ahead of cut deadlines, surely annoying lead OPEC-country Saudi Arabia. Unless the war between Hamas-Israel broadens significantly, experts believe that oil prices and production will remain stable over this winter.

Generally speaking, the investing year ended well and investors are feeling okay coming off of a harsh 2022 market. This advice from Morgan Housel, author of The Psychology of Money, is an excellent reminder of what all should be striving for in our personal wealth. “Good investing is not necessarily about earning the highest returns; it’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.”

On Personal Finance

To no one’s surprise these days, our medical insurance premiums increase every year and unfortunately, usually more than inflation. In 2023, average premiums rose 7% and are up 47% since 2013. Compare that to the Consumer Price Index (CPI), the standard measure of general inflation, which is up 30% since 2013. In dollar terms, the average premium for a single person’s coverage is now $8,435 per year; for a family it is $23,968. Premiums for workers at smaller companies are even more expensive. Lucky employees may count on an employer to chip in some of the cost; self-employed individuals and families have no such option. This relentless surge in premiums has outstripped workers wage increases (see chart), impacting the affordability of health coverage. But why is taking care of our health so darn expensive and is there anything you can do about it?

The “why” is a little easier to answer. Starting with supply, there are not that many available insurance providers. Over 300 million people in the U.S. needinsurance but this has not spurred competition or innovation. And few people go without any insurance coverage making it a highly in-demand service. It is not even a federal mandate to have health insurance, as was stipulated in the early years of the Affordable Care Act. It is however illegal to be medically uninsured in five states - California, Massachusetts, New Jersey, Rhode Island, Vermont – and also illegal in Washington D.C. With or without a law, some 92% of Americans have insurance. The less than 8% of uninsured Americans in 2022 is a record low.

But for those in the business of insuring healthcare, it is expensive and highly regulated. Potential new entrants find it cost-prohibitive and wildly competitive to get started. While there are some 900 health insurance companies in the U.S., five of them provide over 50% of coverage.

So, with little competition and an in-demand service, one expects that the successful few must be pulling in huge profits. According to the National Association of Insurance Commissioners (NAIC) they are not. Using the “loss ratio” measure helps determine how much companies collect in premiums versus how much they pay out in claims to hospitals and medical providers. Per the NAIC, the loss ratio averaged 73% between 2018 and 2022. For every $1 received, roughly $0.73 was paid out for services. The leaves $0.27 to the insurers to cover operational costs like preparing all of those regulatory reports plus administrative salaries, office rent, utilities, and so on. It is not much.

However, and likely no surprise to most, there is a lot of waste in the system. This is the stance of The Peter G. Peterson Foundation which says the U.S. spends more on health care than any other country, with costs nearing 18% of our Gross Domestic Product (GDP). The waste comes from over-treatment, lack of treatment that would head-off future poor health outcomes, lack of coordinated treatment, administrative complexity and abusive, fraudulent costs.

Barring a massive change in our entrenched and messy healthcare system, you can take some personal steps to keep your current and future personal costs down.

* Save money on medicines – get generic prescriptions or ask your provider ifthere is a less expensive medicine for your condition. Prescriptions via mail are sometimes less expensive.

* Use the benefits that you do have like annual checkups and screenings. Take advantage of your plans’ extra options that might include a gym membership, services like massages, discounted eyeglasses or even a health case manager that can help you plan a course of action for more serious health needs.

* Setup an FSA if available. A Flexible Savings Account (FSA) is built with money you put away, although technically owned by your employer, and can be used for healthcare expenses incurred in calendar year. Contributions are made with pre-tax earnings.

* Stay in-network with your providers. This means knowing who those are ahead of time. Visit a clinic or urgent care center versus a hospital that will charge more for emergencies.

* Choose the right plan for your situation. Plans with higher premiums typically cover more of your care; if you use a lot of care, this might be the best choice for you. If you do not use a lot of care outside of your annual visit, consider a high-deductible health plan or HDHP. This plan usually comes with the option to start a savings account called an HSA or Health Savings Account. These are savings accounts that allow you to set aside pre-tax money for health care expenses. Contribution limits are high ($8,300 for families in 2024) and are owned by you, regardless of your future employment or retirement. The money can be invested and used to pay for medical expenses such as deductibles, copays and other qualified medical expenses over the rest of your life.

If you have any questions about this, or any other personal finance questions, please do not hesitate to get in touch. We are always happy to help where we can and make referrals to legal and tax experts as needed.