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“Happily we bask in this warm September sun, which illuminates all creatures…” — Henry David Thoreau
In my Summer newsletter, I told everyone to relax and enjoy the summer, not much was happening one way or the other. The day I started writing that newsletter, the S&P 500 closed at 4455, today as I start this edition, the S&P 500 opened at 4455. Did I see that the S&P 500 was likely to hit that level and start writing this newsletter today on purpose? I’ll leave that up to you to decide. What’s most important is that I was right, there was no recession, no market crash, no spike in inflation or unemployment – just small changes from the months before that were generally expected. Even the Fed, which surprised everyone in mid-June with news that it may raise rates a couple more times this year, stuck to that path in July, raising rates the expected 0.25% and hinting that there may be one more quarter percent rise before year end. But now summer is over, Congress is back in session, another debt ceiling / budget crisis is shaping up for late-September, early-October and the data is showing some funky things.
There has been some bad economic news. Many banks were downgraded by the major ratings agencies, and there’s been lay-offs at a lot of big, multi-national corporations. Just in the past few months lay-offs in the thousands have been announced by CVS, JPMorgan, Morgan Stanley, 3M, Whole Foods, Amazon, Meta (Facebook), Disney and the four big U.S. Accounting Firms. Ironically, unemployment continues to go down and job gains continue to outpace job losses even with these layoffs. What seems to be happening is twofold. First, the majority of the jobs being lost are fairly high paying jobs, Computer Engineers, Bankers, Accountants, Mid-Level Executives etc. Most of those people were making really good livings before the layoffs and have very marketable skills so they’re not having trouble getting re-hired or have the ability to live off savings while they search for their next opportunity. On the lower end of the pay scale, where Amazon has laid off warehouse workers and companies like Jenny Craig and David’s Bridal are shutting down leaving all their employees out of work, the demand for jobs is even more prevalent and the training and or experience needed is minimal. Restaurants, hotels, convenient stores, and almost every service company are understaffed, so the clerk at Jenny Craig making $14 an hour isn’t having much trouble right now finding another job paying $14 an hour, or more. There has been a little spike in gas prices, with the cost of a gallon going up about 30 cents since the last newsletter, but that also seems to be easing. The wholesale price of gasoline, which hit its 2023 high back on August 11 has come back down about 20 cents. That takes a couple weeks to work itself through the system and become reflected at the local gas pumps, but by the time you read this gas is likely to be back to the mid-$3 range.
On the good economic news front, inflation continues to come down. On a year-over-year basis, it has dropped into the 3’s from the 6% level it was running at the beginning of the year. Since housing and rent seem to have peaked last August and September, the next two readings could show an actual reduction in what they call “owner equivalent rent” year-over-year, albeit a small one. Since that housing number makes up more than a third of the whole CPI reading, it’s going to look like inflation has really come under control. As I’ve mentioned before, I’m not sure these lower levels persist over the longer term, but it should be low enough in the short-term to not affect the stock markets. On the growth front, things are doing so well I’m wondering if all the data might be wrong. That GDP Now calculation that I’ve talked about many times, is showing third quarter GDP growth in the United States at a 5.9% annual pace. That’s an incredibly high level for an economy that’s not coming out of a recession. We had really high growth in the Second and Third Quarters of 2021, but that was coming out of the negative and flat economic growth of Covid. This is growth building on over two years of other positive quarters. I’m not sure the actual number is going to be that high – but it’s hard to see how we drop enough to not have a growth rate at least in the 3% range, which is crazy for an economy most people thought would be in a recession by now.
The Budget / Debt Ceiling stuff that Congress is going to be dealing with in the early fall could certainly cause some selloffs in the market even if it plays out like it did back in the Spring where ultimately everything works out. If that happens, we can use that time to perhaps create some tax-loss selling in taxable accounts or just use it as a rebalancing opportunity. Otherwise, the recession risk keeps getting pushed further and further back in time – it seems like a recession has been six months away for two years now. As I’ve said both in these newsletters and to many of you in person – it’s the longer term I’m worried about. Rates have gone up a lot, but not for very long. The majority opinion out there is that rates will be lower a year from now then they are now, and that somehow rates below 3% is the “normal” level that we will get back to while rates over 5% are just a temporary emergency measure the Fed is taking to combat inflation. I think that’s half true. Certainly, the Fed would not have raised rates to their current level if inflation hadn’t gone up – but historically rates have been closer to 5% far more often than they’ve been below 3%. The level of the rates is almost immaterial at this point, it’s the length that matters. Every day that goes by, somebody’s 3% adjustable-rate mortgage resets at 7%. Some corporation’s bonds issued at 4% mature and must be either re-issued at 8% or retired by taking cash from some other part of the business. A $75,000 home equity line that only coast $125 a month in interest payments is now $470 a month. If you think rates are going to go back down, you probably suck it up and pay the higher payments or divert some cash to retire the bond – expecting to refinance or re-issue in six months or a year when rates are back to “normal.” It’s when and if rates don’t come back to “normal” that the hard decisions have to be made. The way our economy typically works is that those decisions are put off and put off and then are suddenly made all at once and boom, Recession. But we’re still talking later next year at the earliest, and maybe the Fed manages rates in a way that it doesn’t happen at all.
I never predict where the stock markets are going to go, just where they have been and where they are. As of today, the all-time high in the S&P 500 was in early January of 2022. It’s odd to not break through a past high during a period where there has been a growing economy. At the same time, stocks in general are still not cheap on an historic basis so you could make the case that even in a growing economy, stock prices should stay relatively flat while the economy grows around them. But even if the stock markets continue to trade mostly sideways in the spiky way that they do, on the bond and cash side you can finally earn some real money owning those assets. If the Fed does lower rates, the interest rates on cash will go down, but prices of bond shares should go up. This may be the best time to own bonds in the past 20 years – but unlike stocks those purchases aren’t typically rewarded in a big rally over a short period, you have to be patient. At these levels, you’re also getting “real” returns. Now that inflation has settled down a 4-5% return on cash or fixed income with a 3% inflation rate is a net return of one or two percent. Three years ago, even with inflation only being 1.3% - the 10-year Treasury yield was less than 1%, meaning you were earning a negative yield on fixed income.
That’s enough economic news for this edition. Welcome to fall, the best season on Cape Cod. This summer was almost a total washout; rain, thunder and lightning and even tornados. Let’s hope for one of those classic Cape Cod Falls, where you can still swim in early October and the sun shines while the humidity goes away. Speaking of going away, both my daughters are now off at college, so my wife and I are empty nesters for the first time. I know from speaking to many of you that the nest could fill back up again once they graduate, but for now that’s our situation. So, if you know anyone who’s needs some retirement or estate planning; just moved down to the Cape or is unhappy with their current advisor – give them my name. I have a lot more free time on my hands all of a sudden.
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