Jeremy Strickler
jeremy@wwmgreenville.com
This market continues to defy prognostication. For about 5 quarters now, the financial industry has been saying: no recession, nothing to see here! OR: OMG it’s an economic maelstrom!
And every quarter, the market awaits terrible earnings that turn out pretty regular and not so terrible after all.
Some of the most outlandish comments have come from some of the smartest and best-positioned people like Jamie Dimon at the country’s biggest bank, who told investors in June of last year to prepare for a hurricane. That’s how you know you can’t forecast things, because people who are paying the most attention, because they have the most responsibility, the most computers and the most brainpower still can’t tell you what’s coming. Also, Jamie D didn’t run JP Morgan Chase into the ground because he couldn’t forecast. They did a lot of things right without knowing exactly what was coming. They managed risk.
And that’s how it is. We are always flying half-blind. I don’t mean us at Williams Wealth Management. I mean everyone, always. The human condition, dude.
There are lots of language tricks to help people deal with this situation. False certainties, comfort-seeking behavior. A lot of those language tricks are dogmas, memes, belief systems– not that these things are true or false but rather that they are un-falsifiable: You’re going to heaven when you die. We should cut taxes and regulations. We need to put more money into education. America is the greatest country. Eat vegetables and drink 8 cups of water. (now let me step outside and have a smoke, my nerves are shot)
Ok. Sure. Now we’re in control of things! I will certainly stave off my impending demise with crystals, sage, jiggling machines, prescription drugs, and over-the-counter suppositories.
(This past weekend, a server used the word “suppository” in her description of the food options. I think she meant things that were substitutable on the menu, but you know she lost me for good after dropping that nugget on the table. And the food lived up to the description, which is to say, it was a little crappy. I guess I was warned.)
So the world gives you suggestions of where you should and shouldn’t go. And by some strange alchemy of how things smell and what your digestion is like today and by thinking hard about things and checking the weather, we muddle along. The main thing, I tell my kids, is to not die, because if you keep on living, you get more chances to get it right. You’d like to think that people who have made it to middle age or to old age have done a lot of improving. But not everybody learns things; some people’s Chi is blocked.
The main morals of my harangue are to keep on living and to pay attention to who you talk to today so you don’t worry about everything. If you’re reading this, you are winning big time at life. You’re still breathing, and at the moment, you’re not talking to stupid people. It’s not like smart people know what’s going to happen, but at least you won’t be bored!
I think an answer for the present age is to pay attention to loneliness and boredom in yourself and the people you love. Try to entertain yourself without lighting your health and your money on fire. Ok, that’s a win.
Secondly, try to be around people who like you and care about you and who reinforce your better judgment, not your resentments and prejudices.
Using that criteria, you probably know about 5: people who like you AND are smart and decent. Talk to one of those people pretty much daily so you keep your head on straight. It’s tough. Some of your best friends are there every day and some of them are only around a couple of times a year. Tell them it’s important you see each other.
They like you too—so it’s not like they have a lot of better options. They’re not invited to Dua Lipa’s birthday party featuring Sir Elton John! Might as well have a glass of wine on the patio at your house. You better think of something interesting to say.
Regarding investments, financial conditions are tightening. That’s what’s meant by these banks going out of business: money is more expensive, which is a way of saying it’s harder to get. Some people are going to have a tougher time getting money. Some banks and businesses will fail.
But that’s not a systemic failure, despite the fact that there are systemic risks. On the contrary, what do you think the Fed was trying to accomplish by raising interest rates? Why, they are trying to slow down the economy.
How? By forcing weaker players out of business and encouraging other companies to pay attention to spending, partly by cutting payrolls. The failure of Silicon Valley Bank is just one part of a story you could have told in advance: the particulars (which bank, the timing) were impossible to forecast, but *that it happened* was pretty much par for the course.
And by the way, it’s not new to protect bank deposits! You want rich people to lose their deposits? Whose money are you borrowing when you take out that mortgage? Out of all the banks that failed in the financial crisis, I don’t remember a widespread loss of deposits.
That’s the *point of FDIC insurance: confidence in the banking system. But the limit is only $250,000! Don’t be so literal. The Fed and The FDIC can stick their finger in the dike. That’s their job.
(Jesus says: don’t take everything so literally. Seriously. He does say that.)
Keep in mind that the Fed are the big banks. If they need interest rates lower, so they stay in business, interest rates can be lower. There’s no question that the banking system isn’t built for short-term rates to be higher than long-term rates. So, it probably won’t stay like this forever.
It will be counter-intuitive to buy longer-term bonds at lower interest rates than money markets pay, but it will probably be smart to do that this year. Unlike last year, longer-term bonds should help offset some of the risk of owning stocks.
I think you can expect to see the market very much concerned about inflation some months, and then in other months, the market will worry about growth. Sometimes like these past few weeks, money will rush into bonds and push interest rates down and some growth stocks will run- even if the reason rates went down is that we expect economic weakness?
It wouldn’t surprise us if we get a zag in our downward inflation trend that scares everyone. Inflation has come down from over 9 percent to about 6%. That’s a good trend. But if we have just one month where it heads back in the wrong direction, the market will probably freak out and sell both stocks and long-term bonds. Balance is key.
There is a tension to be maintained; a weaker economy is not the only concern, though it is a concern. Inflation is still 6% in the US, and in Europe, it is closer to double digits. This problem is not yet solved. We don’t know where rates will peak—although it looks like they don’t need to go much higher in the US.
But the market won’t maintain that tension so much as pivot its focus to one problem or another, whipsawing you all over the place if you’re caught in the story and chasing the action. In one way of thinking about it, the rally in risk assets we’ve seen recently makes sense: interest rates went down. 30-year mortgages are close to a 6-month low.
But I think that’s missing the larger picture that we are in some kind of credit contraction which should put some pressure on asset prices. You can measure that contraction by interest rates or the money supply or by bank failures, but we are drying up some of the liquidity.
So, a risk rally is an opportunity to take profits and rebalance, if that’s appropriate to your situation. Things could happen that fundamentally resolve the tension between inflation and fear of a weak economy. But so far, nothing has changed enough to push us in one direction and make things easier to forecast.
Until unemployment rises, expect the fed to fight inflation, expect price volatility, and expect some pressure on financial assets.
Try to remember that we like it when the market freaks out. The key is to have enough balance in the portfolio to act on price movements when they happen. We are pretty much trying to identify mispriced or attractively priced investments and to help you tolerate the uncertainty that comes with buying them. That’s about 85% of the job you gave us to do for you.
The other 15% is showering, cussing at the brokerages, putting paper in the shred box, and figuring out how to get the laptop to cast to the TV. It worked right before you got here, I swear.
Jeremy L. Strickler, CFP®
Portfolio Manager
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
