Weekly Reflection for February 17, 2023

The Week - An Update in Charts

Markets lost some confidence this week as investors began actually hearing what the Federal Reserve and European Central Bank have been saying for months. Policymakers expect to keep interest rates high and perhaps move U.S. rates up by more than just the 0.25% increase made earlier this month. Higher for longer has been the mantra; some are just now considering what that means for equities.

The Shiller P/E metric or earnings ratio looks at the last 10 years of average inflation-adjusted earnings of the S&P 500 companies. It is still trending well above normal at 29.5; normal is considered between 15 and 20. This tells us that stock valuations are still very high given where earnings are.

Profits are coming down and are forecast (gray section in chart) to fall more in 2023 before picking up. So far this quarter, corporate earnings are down roughly 5% on average since last year. Analysts have been predicting first quarter and second quarter 2023 profits to be negative. Only in the back half of 2023 did expectations turn positive.

Executive comments this earnings season have been meh. Many say that they are still searching for the disinflation Fed Chair Powell speaks of.

Inflation is running hot and cold, trying to break its 2022 fever. Prices are still rising, but not by as much each month. That sound you hear is the tepid clapping by investors while they look around to see what others think. Stock prices rallied on the news but failed to keep the momentum.

There are many reasons why Social Security and Medicare are in such dire financial holes. One of the major ones is due to our dependency rate. The programs depend on a growing workforce, either through increased birthrates or immigration. None of that is happening in the three of the largest and most influential world economies, the U.S., Japan and China.

For every 100 workers in the U.S., there are 57 dependents or non-workers, think elderly or child. In 25 years, that number will jump to 67 in the U.S. This has major implications for taxes, immigration policies and of course, entitlements.

This week a new candidate threw her hat into the ring for the candidacy of U.S. president. Nikki Haley, the former governor of South Carolina, will challenge former President Trump for the Republican nomination. Over the next 21 months ahead of the November 2024 election, the pressure will be on to fundraise and spend as intensely as possible.

The 2020 election was the most expensive campaign. Throw in the congressional campaigns and over $16 billion (in today's dollars) was spent. Winning Representatives spent on average $2.35 million and Senators spent $27 million. There is plenty of reason to believe that the 2024 campaign cycle, clearly already underway, will be as, or more, expensive.

The Corporate Nepotist Debate

Passing down your genetics to your offspring is a given. What the offspring do with those traits is up to them; this is just how the cycle of life works, for better and sometimes for worse. What really rankles people is when others get passed down connections and opportunities that lead to better jobs and lifestyles, hopscotching their equally-able peers. The term “nepo baby” might be recent but nepotism is as old as humanity. It is just that no one complained about a childhood friend inheriting the family corner market. But social media has been giving space to those to complain to the rest of us when the friend inherits millions in a successful corporation.

Some of the world’s largest firms are run by heirs – Walmart, Mars, Samsung and BMW to name a few. Researchers assumed that “the hereditary principle” would not last because of the 20th century's ability to find and retain outside talent. But instead, family businesses have held their ground and expanded their success, helped in no small part by their own access to better education.

The benefits trickle down from a family owning a company to just a parent working at a company. Harvard has been studying the different angles on these phenomena for decades. A new paper from Harvard’s research group Opportunity Insights details just how much getting a job through mom or dad boosts income. As you may have guessed though, the parents at the bottom income percentile are less likely to offer, or have accepted by their children, jobs at with their same employer. Income strata matters. Only 2% of the poorest families share employers over generations. Children from affluent families were three times as likely to work for a parent’s employer and this decision leads to a boost in earnings by 20%. Although in Europe and around the world, career nepotism occurs much more frequently, in the U.S. it is the Hispanic population that benefits from it the most.

In a world where the "haves" are smoking the "have nots" in terms of education, wealth growth, health and in most every other lifestyle category, frustration about how to solve the problem has been a hot topic for over a decade now. When Warren Buffett spoke of his dislike of dynastic wealth to Charlie Rose in 2006, he called those born into wealth “the lucky sperm club”. Or lucky egg.

You Might Be a Caregiver Someday

Even if you do not inherit that business or sponge off some opportunities from mom and dad, you might find yourself in a position of caring for them. It might be a temporary health crisis or a slowly developing situation of declining health. The caretaking endeavor is noble and worthy but one that many find themselves wholly unprepared to take on at first.

Over 53 million Americans are taking care of loved ones who are sick, aging or in some situation that requires them to get help performing the daily tasks of living. These caregivers are unpaid to start with and then suffer additional financial costs. Besides the lost work hours or business opportunities, they incur out-of-pocket costs ranging from $7,000 to $9,000 annually on ancillaries like meals, transportation, medical supplies and treatments.

Here's a profile of the average caregiver, per the CDC:

* One in 5 Americans are currently caregivers

* Women are 58% of all caregivers

* 20% of caregivers are 65 years old or better

* The care recipients are family members and friends of the family

* Half of all caregivers have been at it for at least two years

* One in 6 Americans suspect that they will become a caregiver in the next two years.

If you believe you fall in to that last category, now is the time to start preparing yourself for the task, which can be bigger and harder than you would ever imagine. Start with a plan. It will not cover every scenario but you can work to cover the big items. There are five questions to answer as recommended by Aaron Blight, author of When Caregiving Calls: Guidance as You Care for a Parent, Spouse or Aging Relative.

* What care is required?

* When is it needed?

* Where will it be received?

* Who will provide the support?

* How will you pay for it?

After you make a plan for your loved one, make a plan for yourself. Better yet, assemble a team to support you and all of the individuals involved. One of the saddest parts of this experience is how much of a toll it takes on the caregiver. While, ironically, the one receiving care reports a higher quality of life than would be otherwise, caretakers report falling into depression and neglecting their own self-care.

If the care will be long, or maybe involve an end-of-life scenario, it’s best to get health care directives, wills or trusts and other financial affairs in order, sooner rather than later.