NWP Monthly Digest | September 2022
The Artemis Never Launched but Will the Market Take Off?
The Autumn Equinox will be observed on September 22nd this year. Of course, this marks the first day of fall. September is a month when temperatures drop, colors change, and leaves begin falling. Akin to the seasons changing, the stock market has historically observed the change in colors in September as stocks in the green began trading in the red, and securities have fallen instead of the leaves. September has been the worst month for the U.S. stock market with an average loss of 1% going back to 1928. In 2022, investors have become acclimated to the fall – the stock market, the bond market, real estate, and economic growth have been falling since the Fed commenced on its adamant mission to bring down tenacious inflation. The narrative that the Fed could not control inflation and would force the U.S. economy into a recession sent risky assets tumbling - resulting in the worst first half of the year for equities since 1970 and the worst first half on record for bonds (since 1900).
In July, Jamie Dimon demonstrated his acumen with an insightful and succinct assessment of the business environment.
“In our global economy, we are dealing with two conflicting factors, operating on different timetables. The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy. But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.” - Jamie Dimon, Chairman and CEO of JPMorgan
After a pair of unprecedented 0.75% rate hikes in June and July, buoyant investors assumed the job was done and expected the Fed to pivot to a market-friendly tone. They were sadly mistaken. The market descent appeared to skip fall and head straight for winter after the Fed Chairman, Jerome Powell, delivered a stern commitment to halting inflation at his annual policy speech in Jackson Hole, Wyoming.
“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored…We will keep at it until we are confident the job is done.” - Jerome Powell
Powell expressed an inexorable desire to continue raising interest rates to placate inflation despite causing “some pain” to households and businesses. Investors reacted accordingly, sending the S&P 500 tumbling to end the month with four straight days of losses. Looking ahead, investors eagerly await the jobs report on Friday for any signs the Fed can tap the brakes.
The Artemis rocket failed to launch last week. Our economy and the stock market also experienced minor setbacks, and it is conceivable to see more before the end of the year. There’s always a reason not to invest, and formidable headlines distract investors from their long-term goals. Over time, we observe the true testament of stock market resiliency. Each stock market decline felt terrible, and today is no different. But when we track the overall growth the market has achieved, it’s clear those investors exhibiting discipline, persistence, patience, and commitment have been rewarded. True success is revealed when we rise above calamities. NASA wasn’t deterred after the setback due to engine issues and has rescheduled the launch for Saturday. Perhaps the Artemis launch is emblematic of enduring investors observing their portfolio's launch after several failed attempts this year.
What Happened Last Month?
There was no shortage of developments in the world of business. A slew of economic data, a wild ride for investors, geopolitical events, natural disasters, and political headlines. The S&P 500 stock market index dropped 4.2% in August. The yields on the 5, 10, and 30-year government bonds all rose above 3%, and the 30-year mortgage rate rose to 6.03% yesterday. Natural gas prices have almost doubled in the U.S., and the dollar has risen to its highest level since 2002.
A Mixed Bag of Economic Data
Economic data has been dubious. On one side, the consumer remains vibrant. Household balance sheets, wages, and job growth are all on firm footing. Meanwhile, economic data apart from the consumer strikes an ominous tone. Productivity in the second quarter was negative 4.6% as many blamed the impact of remote work. The 2.5% decrease in nonfarm business sector labor productivity from the same quarter a year ago was the largest decline in labor productivity since that data series began in 1948.
Yield Curve Signals
The fact that the yield on the 10-year Treasury Bond is below the 2-year yield means that markets are pricing in lower rates over the longer term. Essentially, investors expect to see rates rise, then fall, over the coming years. It's also a warning sign that a recession is potentially on the horizon. In recent communications with clients, I have proclaimed the signal to watch is the spread between the 3-month and 10-year Treasury Bond, which hasn’t inverted yet. If it inverts, the Fed has overtightened rates, and it would be a sign that the bond market is all but 100% certain a recession is imminent. This spread has inverted before every recession since WWII.
A Busy Biden
The Biden administration announced the Student Loan Debt Relief plan which forgives $10,000 to $20,000 of federal student loan debts, extends the forbearance period until January 2023, and modifies provisions of the loans to aid borrowers.
The landmark, bi-partisan CHIPS and Science Act provides $53 billion in subsidies for U.S. semiconductor production and research and $170 billion for new regional technology hubs aimed at reducing long-term supply chain vulnerabilities for next-generation communications, computers, and pharmaceutical manufacturing.
Finally, the U.S. Senate passed the ironically titled Inflation Reduction Act (IRA), which includes $369 billion for renewable energy tax credits, $64 billion to extend Affordable Care Act subsidies through 2025, tax share buybacks starting in 2023, and allows Medicare to negotiate the price of prescription drugs and impose caps and rebates, including a cap on seniors' insulin costs at $35 per month.
Noble Wealth Pro Tip of the Month
Time Is on Your Side
During periods of volatility, disciplined investors take a step back to view portfolio returns from a longer time horizon. From 1950 until 2021, the odds of the stock market experiencing positive returns over one year were slightly better than a coin flip, and returns ranged from positive 47% all the way to negative 39%. Yet, over any 20 years, the stock market was never negative, and the worst returns were still positive 6%.
Student Loans
President Biden announced a sweeping student loan forgiveness plan that will provide up to $10,000 in loan forgiveness for people with annual incomes below $125,000 or couples with incomes under $250,000. Those who received Pell Grants, a federal financial-aid award for students from low-income households, can be eligible for forgiveness of up to $20,000. The pause on mandatory payments has been extended until the end of the year, with payments set to resume in January 2023. Given the sweeping changes, consider the following items:
Manage your gross income: Borrowers on the edge of the income limits may want to consider deferring income or possibly reducing their income to maintain their eligibility for loan forgiveness.
Consider not claiming your child as a dependent: Only those who are not claimed as a dependent are eligible for forgiveness. Have a financial planner or an accountant determine if the benefits of loan forgiveness exceed the advantages of claiming your child as a dependent.
Retiring Soon?
Those retiring in the next few years will likely face an uphill battle. But that doesn’t mean these retirees will watch their nest egg’s demise. Follow these steps to improve your odds of living a fulfilled retirement.
Cut spending when markets decline: For current retirees, consider forgoing inflation adjustments following any year in which your portfolio incurs losses.
Reduce portfolio risk: A 2014 study by researchers including Wade Pfau finds that those who start retirement by reducing their stockholdings to 20% to 30% of their portfolio and then gradually push it back up to 50% to 70% in stocks have the highest probability of making their money last 30 years using the 4% spending rule.
Use other assets: Those with lines of credit, margin loans at a reasonable rate, life insurance, and possibly reverse mortgages (if necessary), may consider alternate sources of capital during periods of market volatility to sustain their lifestyle.
Track Your Mileage
Self-employed business owners can save thousands of dollars by tracking miles driven to work. The new rate for the final six months of 2022 will be 62.5 cents a mile, up from 58.5 cents a mile, which itself was a 2.5 cent increase from 2021. If the difference is significant, taxpayers have the option of using the actual costs of operating a vehicle in lieu of the standard mileage rate.
Delay Social Security
Many retirees are on fixed budgets, and the purchasing power of their assets wanes as inflation rises. For financial planners, this can be a serious risk to financial plans. Social Security has an embedded inflation hedge since the benefit payments increase automatically with the cost of living. In October, the Social Security Administration will announce the cost-of-living adjustment for 2023, which could be the highest since 1981. Delaying your Social Security benefits allows you to receive that inflation adjustment on a larger benefit amount and hedges this purchasing power risk due to inflation. If you’re nearing full retirement age, have a financial planner evaluate the decision to delay your benefits.
Fun Facts of the Month
After reaching an all-time US high of $457,000 in April 2022, the median sales price of new homes sold in the USA has fallen during the last two months to $402,400 in June 2022, its lowest level since June 2021 (Census Bureau).
As of 6/30/2003, credit card debt in the US was almost three times the size of student loan debt, i.e., $690 billion to $240 billion. By 6/30/2010, credit card debt ($740 billion) was smaller than student loan debt ($760 billion). As of 6/30/2022, credit card debt ($890 billion) has been overwhelmed by student loan debt ($1.59 trillion) (Federal Reserve Bank of New York).
Credit card debt has jumped by $100 billion, or 13%, the biggest percentage increase in more than 20 years (New York Fed).
The most tax-friendly states for taxpayers are Delaware, Alabama, Arizona, Colorado, D.C., Hawaii, Nevada, South Carolina, Tennessee, and Wyoming. The most stringent tax states are New Jersey, California, Connecticut, Illinois, Iowa, Kansas, Nebraska, New York, Texas, Vermont, and Wisconsin (Kiplinger’s Retirement Report).
Recent surveys found that 36% of Americans making six figures and 30% of those earning $250,000 a year are living paycheck to paycheck (Towers Watson | LendingClub).
It has been 109 days as of Tuesday since a U.S. company raised at least $25 million in a traditional IPO, edging out the previous record in 2008 (Dealogic).
U.S. bonds experienced their worst first half of the year in 40 years, down 10.35%. U.S. stocks also suffered their worst first half of the year since 1970, down 19.96% (Victory Capital Management).
The median net worth of married couples 25 to 34 years old was nearly nine times as much as the median net worth of single households in 2019. In 2016, married households’ median net worth was four times as much. And now, after a spell of rapid inflation and more than two years of pandemic living, single people are getting left further behind (Federal Reserve Bank of St. Louis).
More than 37 million adults over age 50 (1 in 3) are at risk of not having enough to meet their basic needs (AARP Foundation).
In mid-2018 there were more active home real estate listings than there were agents, but in 2022 there are three times more agents than listings (National Association of Realtors).
In a study of 2,000 universities, the pay of male grads topped female by more than 10%. At Georgetown, the male accounting majors earned $155,000 after three years, a 55% premium over their female classmates. At Michigan, the male law grads earned $165,000 after three years vs. $120,000 for females (Wall Street Journal).
As of 7/20/2022, the last bank in the United States to require a bailout from the Federal Deposit Insurance Corporation (FDIC) was the Almena State Bank of Almena, Kansas on 10/23/20 or 21 months ago. In the last 20 years, that’s the 2nd longest stretch without a bank failure in the country (FDIC).
The USA’s $845 billion trade deficit in 2021 was our country’s 46th consecutive year of trade deficits (1976-2021). Between 1960 and 1970, the US ran a trade surplus every year (Department of Commerce).
The Federal Reserve began a reversal of “Quantitative Easing” on 6/15/2022 with its program of “Quantitative Tightening,” i.e., changing from monthly purchases of $120 billion of bonds to a monthly runoff of $95 billion of bonds. Fed analysis suggests that every $1 trillion of reduction of bonds from the Fed’s $8.5 trillion balance sheet would have the same impact as a 0.20 percentage point increase in interest rates (Federal Reserve).
Inflation, as measured by the “Consumer Price Index,” was up +9.1% on a trailing 1year basis as of 6/30/2022. That’s the 7th consecutive month that has reported inflation of at least 7% on a trailing 1-year basis. Between June 1978 and February 1982, the US suffered 45 consecutive months that reported at least 7% inflation on a trailing 1-year basis (Bureau of Labor Statistics).
More Americans died in 2021 (3.459 million) than in any year in US history (National Center for Health Statistics).
The Abortion Rate among Black women in 2019 was nearly quadruple the rate of White women and more than double that of Hispanic women. The disparity is the result of a lack of access to effective use of contraception (The Washington Post).
In 1950, the average person made $3,300 annually, and the average house sold 2.2x higher at $7,350. Today, the average person makes $57,000 annually, and the average house is valued at $359,000, 6.3x higher (St. Louis Fed).
The 12 bear markets since World War II—other than the current one—lasted an average of 10 months from market peak to trough, with an average drop of 34%. If this bear market follows that pattern, it won’t hit bottom until October (BTN Research).
In August of 1971, President Nixon went on television to address the country on his measures to combat inflation. He imposed a 90-day freeze on wages and prices for the first time since World War II. Nixon’s speech also included a policy change of far greater importance: The U.S. was abandoning the Bretton Woods financial system that had pegged the world’s major currencies to the U.S. dollar, convertible to gold at $35 an ounce. Amidst stubborn inflation and an oil embargo, Nixon approved daylight savings time in 1974 to decrease the amount of energy we would need.
What We’re Reading
The Secret to Braving a Wild Market | Jason Zweig
For most of the past decade, investing has required almost no courage at all. That may well be changing. Few investors have been truly tested since The Financial Crisis of 2008. Mr. Zweig put together a short article serving as a reminder of what it takes to succeed as a long-term investor. In this chart, Mr. Zwieg points out two things:
First, glaringly obvious big fears, like the risk of nuclear war, can blind investors to insidious but more likely dangers, like the ravages of inflation.
Second, investors need not only the courage to act, but the courage not to act—the courage to resist.
Make Your Kids Millionaires | Loral Langemeier
As a parent, it’s your responsibility to teach your children financial literacy, setting them up to have “millionaire mind-sets” later in life, explain finance experts Loral Langemeier and Kyle Boeckman. Schools teach children little about entrepreneurship, money or investment, so the authors urge parents to pick up the slack.
Know Thyself - The Science of Self-Awareness | Stephen M. Fleming
Stephen Fleming lays out the basic principles of metacognition - the way we think about what we think. By understanding our metacognitive processes, we can turn them to our advantage, to make accurate, informed judgments.
America Is in Denial | Mitt Romney
The piece highlights numerous potentially “cataclysmic events” facing the nation, namely droughts out west, inflation, rising debt levels, profligate government spending, melting ice caps, illegal immigration, and the events of January 6th. Interestingly though, Romney argues that the most significant threat is actually not the events themselves, but rather Americans’ refusal to address them.
We wish you all the best. Winter is coming…
Your team at Noble Wealth Partners