Financial Pathways Autumnal Update

I haven’t posted any commentary in a while, what with the Schwab conversion and a long overdue vacation. 

The Schwab conversion went swimmingly, although I am still getting used to new system and procedures.  The vacation was also wonderful.  Laura and I visited Sedona AZ, my first time to that state.  Scenery was spectacular.

So now I have to figure out what I think about this economy and markets.  We are in a very strange world.  By all the economic statistics, the economy is great.  Economic growth is strong.  The unemployment rate remains near all time lows.  Inflation is still elevated, but far off its highs of a year ago. 

Yet, people feel rotten.  And for good reason.   Credit card balances (and delinquencies) are rising again, after falling dramatically during the pandemic.  Auto loan defaults are on the rise.  These are signs of consumer stress that we normally see during a recession – not during a period of statistically low unemployment and strong economic growth!  It is a reminder of just how powerfully destructive a force inflation can be.  

Interest rates are high – but not really by long term historical standards.  Go back 15 to 20 years and today’s rates would have seemed normal.  The problem is that years of low interest rates have stocked demand and allowed the price of cars and houses to soar.  Its now the combination of high prices AND high interest rates makes big ticket purchases nearly impossible for many consumers.  

High interest rates remain a problem for stock prices.  Increasingly, I hear my clients saying “Why should I bear the risk of stocks when I can get over 5% in a nice safe FDIC insured CD?”.   Well, just like house prices and car prices, stock prices had been pushed higher for many years due to low interest rates.  When interest rates were 1% or less, investors needed to put money into stocks because “there was no alternative”.  Well, now there is, and investors’ newfound interest in fixed income means less demand, and thus lower prices for stocks.  

Both stock and bond prices might benefit from an end to the steady march higher of interest rates.  But rates are unlikely to come down as long as inflation remains sticky.  And inflation looks to remain a problem as supply chain woes are replaced with high oil prices resulting from supply constraints.

So (gotta hate the two handed financial advisor) you need to look at the economy two ways.  Optimists will point out that economic growth seems strong, and the economy has been making fools of all those who called for recession in the face of higher interest rates.  On the other hand, forces weighing on the economy continue to build as inflation, high rates, and now a resumption of student loan payments assault consumers and businesses alike. 

Our portfolio strategies during a difficult 2022 outperformed all relevant benchmarks, due to a defensive posture and limited exposure to interest rate sensitive sectors in the bond market.  Despite the rally in the first half of 2023, we have not taken that defensive posture off.  That may have caused our clients to trail benchmarks for a few months.  Now stock and bond markets are under pressure again – and again we are outperforming benchmarks this quarter.  

Am I calling for or anticipating a recession or a bear market?  By no means.  I am not in the predictions game.  What wins at the investment game is consistent exposure to the markets over time – not predicting future ups and downs.  So I maintain exposure to stocks, and bonds – but I am also taking advantage of newfound defensive opportunities that have presented themselves due to higher interest rates.  I don’t give up all that much return to move a slice of the asset allocation into high yielding CDs or ultra short bond funds!   If the economy slows and interest rates fall – we have exposure to bonds that should rally in that environment.  If rates continue to go up, our cash positions will earn higher rates of interest which will help support portfolios.  If the economy chugs along and interest rates stabilize, stocks will do fine.  In other words, we strive to remain well diversified and outcome agnostic.  Investing is a long-term pursuit and the rewards will come to those who remain consistent in their approach.