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Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not.
-Bill Gates
In 1999, Global Crossing was one of the giants of telecommunications. They controlled over 100,000 miles of fiber optic cables, connecting 27 countries around the world. Over 20% of all the undersea cable bandwidth was owned by Global Crossing and if you wanted to make a phone call to a foreign country or use the emerging internet for almost anything – there’s a good chance you were using a Global Crossing cable. As the ‘90’s came to a close, Global Crossing was valued at almost $50 Billion dollars, making it one of the most valuable companies in the world. Then the dotcom bubble burst, and many companies that were engaged in shoddy accounting, Global Crossing among them, came to light. The company filed for bankruptcy in January of 2002 and all that high-speed cable, connecting the world, was sold for a mere $250 million dollars. (To put that admittedly huge number in perspective, Jaylen Brown of the Boston Celtics signed a six-year contract this summer that will pay him over $300 million.) But that’s only the bad news. The good news is that suddenly all this fiber optic cable that carried phone calls and internet information could be used cheaply and still make a profit since the companies that bought them paid pennies on the dollar of what Global Crossing paid to string or lay those cables in the first place. This led to a huge reduction in the cost of calling people in other countries, (remember those ads about 8 cents a minute to call Europe?) More importantly, it made it much cheaper and faster to use the internet. The reason you haven’t paid a long-distance bill in 20 years is in a large part because Global Crossing declared bankruptcy and over 9,000 people lost their jobs.
Sometimes seemingly bad news can be good news in other contexts, and I think this is one of those times if you’re simply looking at the value of the stock market. The number one thing affecting the stock market’s movement right now is where interest rates are and where they’re going. Certainly, it’s not the only thing, but it seems to be more important than all the other things combined. Where rates are moving depends a great deal on what the Federal Reserve does, and what the Federal Reserve does is influenced by how strong economic growth and employment are, and their impact on the overall inflation rate. This means, that at least for now, any seemingly negative news about the economy, especially a slow down or even reversal in hiring is likely to be met by the stock market with higher prices, whereas seemingly good news like job growth and even lower unemployment will likely lead to softer prices.
The first week of October the markets sold off pretty substantially, yes on the actual day the employment report came out (much higher than anticipated) the market rallied somewhat -but that seemed to be a bounce rather than a trend. Third quarter GDP growth is almost certain to be in excess of 4%, so the Fed is going to have “room” to raise rates again in November and possibly keep them at that level for quite a while. In response, the stock market is likely to stay soft with all this good news allowing the Fed to maintain this course. The Fed is made up of human beings, with all the foibles and egos that entails. I bring that up because there are indications the economy may be slowing rapidly. In response to a slowing economy, the Fed typically lowers interest rates. But how does a group of people raise rates in November and then claim they must lower them in January or February? Even if it was warranted, they’re going to have to hold off on any change of direction for at least six months just so they look like they know what they’re doing – baring some terrible outside event like a 9/11. I think the Fed raised rates later than it should have, I think they’ve already raised them too much, and I’m guessing they will keep them too high for too long. The only “bad” news that the markets treated as bad news was the possibility of a Government Shutdown, which of course is back on the agenda in about a month, but this time we don’t even have a Speaker of the House (as of this writing) to begin the budget process. In this good news is bad news market, is there any good news for us?
There are a couple of bright spots. First the markets react ahead, so they’ve already priced in the Fed raising rates again in November and keeping them high for at least a few months. Any change in that trajectory they’ll likely react to swiftly and positively. (The attack on Israel took place just a few days before this writing, and the markets have been up – do the markets think that violence will be an excuse for the Fed to skip an increase?) An end in the Fed increase cycle also means the downside risk to bond prices diminishes, and the higher interest rates and possibility of an upside in prices when rates do finally start to go down again make them very attractive. Inflation is also coming down so as I said last month, for the first time in a very, very long time you can actually earn more on your cash than it’s losing to inflation each month. Gas prices were cratering before the violence in Israel drove them back up a little bit – but if they go back to trend gas prices could easily be in the 2’s again by Thanksgiving. Heating prices overall seem like they’ll be about the same as last Winter, which is no great shakes but better than the sharp increase we encountered in 2021 and 2022. Overall, when looking at investment portfolios, things might be reversed over the next couple years from where they’ve been for about the past decade. Since the financial crisis, interest rates have been so low that almost all the growth in portfolios has come from the stock side, while the bond and cash sides earned low single digit returns (while adding stability and security.) Given where stock valuations are today, and where projections for growth are over the next couple years, I don’t see how stocks perform much better than mid-single digits in the medium term. (They’ll do so of course by having double digit swings in both directions as normal.) Meanwhile, it’s now the bond and cash side of your portfolio that’s earning at least 4-5% and its bonds that have the upside share price potential when and if the Fed cuts rates, even if that doesn’t happen until later next year. Middle single digit returns may not seem like good news, but being able to get them owning less volatile assets may turn out to be a positive looking back two or three years from now.
So where does that leave us this month? Just like every other month, with plenty to worry about and no answers about what the future will bring. There’s violence in the Middle East, a budget issue that needs to be solved, nobody is currently filling the second most important elected position in our government and a Monopoly lawsuit was filed against Amazon that could potentially change the regulatory environment for the most valuable companies in the world – for good or ill. Other than that, not much. As always, we’ll get through it all together. In the meantime, control what you can control. Make sure your beneficiaries and legal documents are up to date; take advantage of these higher rates by making sure you’re getting at least 4% on your long-term savings; double check your monthly spending to make sure you’re not paying for a service or membership you forgot about and no longer use. I’ll be back in touch next month, maybe with some good news. In the meantime, if you need anything please call; if you know anyone who might need our help, please have them reach out to us.
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