|
On March 25th, 1199, English King Richard I, is wounded by a crossbow while fighting in France. Within two weeks, Richard the Lionheart was dead, and his brother John took the throne. Richard became King of England in 1189 following the death of his father, Henry II. His reign was marked by conflicts, particularly with his father and brothers, as they vied for power within the Angevin Empire. Richard gained his epithet, "the Lionheart," through his exploits in warfare. He participated in the Third Crusade, earning a reputation for valor and tactical acumen, although the crusade ultimately failed to recapture Jerusalem. Failing to recapture lands was apparently a family trait. King John I renewed the war in France without success, losing holdings in Normandy, Maine, Anjou, and part of Poitou. He spent the better part of a decade invading the continent at an enormous cost to the realm. To finance his overseas misadventures, he raised taxes and ruthlessly squeezed every penny he could from his barons, his nobles, and the church. They rebelled eventually, forcing him to sign the Articles of the Barons, laterknown as the Magna Carta, voluntarily limiting his royal powers. At least for a while. These days, it doesn’t take foreign military adventures or royal successions to boost spending to levels that lead some to use their own creative epithets. Thanks to COVID relief programs and easy money policies totaling close to $12 Trillion, what was already a massive debt — more than $23 trillion at the start of 2020 is now $34 trillion and rising. Interest costs on the national debt are projected to total around $66 trillion over the next 30 years. They would become the largest “program” in the federal budget within that period — surpassing Medicare in 2046 and Social Security in 2049. Absent another Magna Carta, we should expect taxes to rise to meet these debt obligations. But many ignore the issue and hope it will go away. That’s more like being the cowardly lion from The Wizard of Oz than being lion- hearted. Your family trait should be to prepare the correct strategy and demonstrate tactical acumen for the battles soon to come.
0 Comments
 When 6 Equals 3
Markets can bend and twist reality in very strange ways when they have decided on a direction. Spoiler alert: The direction right now is upward. Remember when we started the year, and markets were expecting six or seven rate cuts in 2024? Then Federal Reserve Chair Jerome Powell cooled expectations at the end of the January meeting and again on “60 Minutes” by stating very plainly that six cuts were three cuts too many and there would be no cuts at the March meeting. The Fed didn’t flinch in off-meeting messaging, and the data — whether unemployment, inflation or economic growth — wasn’t cooperating. But all the while, the markets had a strong desire to move upward. The data wasn’t behaving, inflation remained stuck between 3-4%, gross domestic product (GDP) was still strong and jobs weren’t cooling fast enough to justify a cut in March, so expectations shifted to a cut in June. Then there were whispers that we may not even see the base case of three cuts in 2024. Markets foundered and waited for the Fed’s March meeting. After announcing no action at that meeting, Powell stepped up to the mic. What the market heard was music to its ears: There are going to be three cuts in 2024. Plus, there was barely any mention of hitting 2% inflation at any specific time, cooling the economy or slowing wage growth and higher unemployment. Instead, Powell said the latest data points “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%.” He also said, “We don’t really know if this is a bump on the road or something more. We’ll have to find out,” and “We’re not going to overreact … to these two months of data, nor are we going to ignore them.” These were pretty dovish remarks, and that was all it took to jack up markets to new all-time highs last week. Please remember there have been zero rate cuts this year, and until we actually see one, all we have is expectations. New records call for new predictions The S&P 500 sat at 4,769.83 at the end of 2023, and we closed last week at 5,234.18. That’s growth of around 10% for the year so far. We had predicted we would end 2024 at 5,250; what we didn’t expect was revising the target after only one quarter. It appears the S&P 500 will move higher, but it probably will not be a straight line. The anticipation and indirectness of “pricing in” rate cuts are always more exciting than the real thing when it does happen and can be very punishing when it does not. The current run will likely run into April and possibly May. We may stumble in the summer and get nervous around the election, but we will recover and go higher. With that as the base case scenario, the S&P 500 could get as high as 5,500-5,600 by year-end. Take this opportunity to position yourself for the rest of the year; make sure you aren’t overextended and don’t forget to lock in higher rates, since we know they won’t last forever. However, neither will this market — so make sure you are set to withstand some volatility. You will be rewarded for your discipline and patience in the end. Coming this week
 Clouds gather for the Fed Inflation data did not cooperate with the market’s expectations last week. People keep spending, energy costs are rising and prices keep going up. After a hotter-than-expected jobs report the previous week, markets regained their composure early in the week, choosing to focus on the unemployment rate going from 3.7% to 3.9% instead of the surprisingly high number of new jobs in February. Payrolls for December and January were significantly revised down, the unemployment rate increased and wage growth was weaker than forecasted. The labor market continues to rebalance, but it’s rebalancing too slowly for the Federal Reserve. Then we received fresh data on Tuesday showing inflation just isn’t coming down. The markets began to swoon because the expected rate cut continues to be pushed further out because inflation remains stubbornly high for the Fed’s liking. We have hovered between 3.0% and 3.7% on the Consumer Price Index since June 2023. It’s beginning to look like a trend — and not one the Fed likes. The longer inflation remains elevated and significantly above the Fed’s targeted 2% level, the longer rates will stay exactly where they are. June rate cuts will be pushed to July and September, and we will continue this data rubbernecking. The question is, why is the market still at its current levels? It’s where it is due to the belief that we will get rate cuts in June or July and that the economy will experience a soft landing. But betting on one outcome when the likelihood of other outcomes is also plausible is probably not a smart strategy. One of those other outcomes is the very real possibility that inflation has gone as low as it will go given the current efforts by the Fed and that additional hikes will be required to get us to 2% inflation. In other words, a 5.25% fed funds rate gets us 3% inflation, so if the Fed sticks to its goal of 2%, what rate gets us there — 5.5%? 6%? 6.5%? What does that do to the economy? This outcome has drawbacks: Inflation is sticky at 3%, and if the Fed raises rates instead of cutting them, it could drive us into a deep recession. The other scenario is that the Fed redefines its benchmark for inflation. They make the decision that 2% has been used as the target for so long, it’s no longer relevant — so the Fed decides to “upgrade” its target inflation to 2.5-3.5% to reflect our more modern and complicated environment. If that happens, we could see sluggish economic growth. Rates will be cut here and there if we remain below the range, and we bob around each time data comes out. Right now, markets are still holding on to the idea of the soft landing, no recession in 2024 and some Fed cuts this year. The chances of all this happening seem to be about 50/50, at best. Time running out for TikTok Congress finally got to business with respect to TikTok last week. It’s not clear what the House Energy and Commerce Committee heard behind closed doors, but it prompted a 50-0 vote to send a bill to the full House directing parent company ByteDance to sell the app or else have TikTok banned in the U.S. (It appears ByteDance didn’t get the memo that it’s helpful for a high profile and controversial business to cultivate friends in D.C.) Once in the House, the bill passed 352-65 and is now with the Senate. If it gets a majority there, President Joe Biden said he would sign it into law. Coming this week
On March 18, 1944, twenty-six people die, and thousands are evacuated from their homes during an eruption of Mount Vesuvius on the Gulf of Naples.
It was the least of Italy’s worries in those fateful years, and the eruption pales in comparison to the destruction of the one in 79AD, where Herculaneum and Pompeii were wiped out by volcanic ash and gas. Yet, volcanic activity demonstrates that significant risk is still present. Vesuvius has erupted numerous times, with significant eruptions recorded in 1631, 1794, and 1944. These eruptions varied in intensity, causing damage to surrounding settlements and prompting evacuations of nearby populations. Today, over 700,000 people now live in the “death zone” around Mt. Vesuvius. Clearly, the painful lessons of history are no match for the allure of wine, olives, and ocean-front property. Despite its frequent activity, Vesuvius remains closely monitored, with scientists and authorities implementing measures to mitigate the potential impact of future eruptions on the densely populated region surrounding the volcano. The risk is known, and despite the volcano’s current quiet period, scientists are attempting to measure and mitigate it. Now that is risk management. Regularly assessing and evaluating risks within a portfolio is akin to navigating a ship through turbulent waters. Then again, that might not be the best metaphor given that the Admiral of the Roman Fleet, Pliny the Elder, died sailing to offer assistance to Vesuvius’s victims in 79AD. Nevertheless, portfolio risk management requires vigilance and adaptability. Investors must continually scan the horizon for potential threats that could disrupt the smooth sailing of their investments. Conducting thorough risk assessments involves identifying and analyzing potential threats to the portfolio, including market volatility, interest rate changes, and geopolitical events. Risk management also means staying vigilant and adaptive during the calm periods where nothing is on fire. Now, when nothing is happening, is the best time to make sure you will be prepared when market volatility erupts. March 17, 1776, General George Washington deploys heavy guns from the capture of Fort Ticonderoga on Dorchester Heights above Boston.
The move forced the British to abandon the city and retreat to Halifax, Nova Scotia, to plan their next moves. This withdrawal allowed the American forces, under the command of George Washington, to gain a strategic advantage in the Boston area. The British eventually shifted their military focus to other regions, including New York City and Philadelphia, to regain control and suppress the rebellion. The abandonment of Dorchester Heights marked a turning point in the war, giving the American patriots a much-needed morale boost. General Gage, commander of the British forces, noted: “In all their wars against the French (the Colonists) never showed such conduct, attention, and perseverance as they do now." Gage’s recall is selective. In 1755, he was ambushed by the French near Fort Monongahela after failing to secure the elevated bluffs along his march. He failed to remember that lesson about the importance of the high ground or the Colonist whose troops helped cover his retreat that day, named George Washington, a young Major of the Militia noted for his bravery. Selective memory is not merely the stuff of history or historically out-of-favor characters. It is a very modern and universal trait. To put it into a very modern sports analogy, it is like watching a highlight reel of your favorite team's victories while conveniently forgetting about their losses. In the case of the revolutionary currency known as Bitcoin, the recent surge in its value might make investors selectively forget about its volatile history. They might focus solely on the skyrocketing prices, conveniently ignoring the dramatic crashes and fluctuations that have characterized Bitcoin's journey. Since 2010, Bitcoin (BTC) has undergone 15 significant drawdowns, each surpassing a 30% decrease from its previous peak. Among these, the most severe included two overwhelming drops of 94% and declines of 85%, 84%, and 78%. Some of these drawdowns unfolded over many years. Similarly, after hitting bottom, it sometimes took years for Bitcoin to regain the high ground. A selective memory might provide temporary comfort, but a well-informed approach is key to navigating investments and revolutions.  Unemployment at a 2-Year High
While the stock markets are mostly rallying, the labor market appears to be cooling down. According to the latest findings from the Labor Department, the U.S. jobless rate reached a two-year high in February after an unexpected climb from 3.7% to 3.9%. On Wednesday, the Labor Department announced that job openings had fallen in January to their lowest levels in three months. Despite the fall in openings, however, hiring remains strong. Employers added 275,000 jobs in February, 75,000 more than what had been predicted. Meanwhile, hourly earnings rose 0.1% in February compared to 0.5% in January — a positive sign for inflation. The decrease in job openings could also be a result of fewer workers leaving their jobs. While the pandemic marked an era of record high numbers of workers seeking out greener pastures with other employers, the Labor Department reports that the rate of workers voluntarily leaving jobs fell to its lowest level since August 2020. Coming this week
On March 6, 1947, Richard Fosbury was born in Portland, Oregon.
As a youngster, Fosbury finds that he is pretty average at every high jump technique but his own. The physics of his method allows him to run faster and convert more potential energy into upward motion by turning his back to the bar and "flopping" over it. Using the technique at Medford High School in Oregon, Fosbury earns a partial college scholarship at Oregon State, sight unseen. But his college coach tries to steer him back to orthodoxy, growing tired of the jokes, often from the staff at the rival University of Oregon. Fosbury has the last laugh, setting collegiate and American records on his way to winning an Olympic gold medal at the Mexico City Olympics in 1968. Since 1980, no one using any other method than the Fosbury Flop has held the world record in the high jump. Here is the history lesson that I wrote just last year: "Learn from the most successful flop ever! Just because everyone else is doing things the same old way, that doesn’t mean you should. A certain amount of flexibility is needed in sports and life. As interest rates rise, that is bad news for spenders looking for cheap credit. But it is probably the best time in two decades to be a saver. Look for rates on things like savings and CDs to be less of a joke than they were a year ago. And as the bond market resets, it too can add some potential energy where there was none at this time in 2022." Yes, all of that has happened and more. Add T Bills and fixed annuities to the list of conservative investments paying the best rates they have in almost a generation. Welcome to the renaissance of the conservative investor, brought to you by high interest rates. Don't turn your back on it. 
New records for the S&P 500 and Nasdaq The market keeps on rallyin’. Both the S&P 500 and the Nasdaq pushed to record highs last week, surpassing highs from early 2022. February was a strong month for each major index, and U.S. stocks have had their best start to a year since 2019. The most significant market mover last week was the core personal consumption expenditures (PCE) report on Thursday. Core PCE measures what consumers spent in the past month, minus food and energy, and is the Federal Reserve’s preferred gauge of inflation. This number rose 2.8% year-over-year in January, aligned with forecasts. Overall PCE fell to 2.4% that same month, down from 2.6% the month prior. Stocks jumped following the report’s release. Still, the Fed seems unfazed and determined to stay the course. A barrage of Fed officials (12, to be exact) took to their respective podiums last week, delivering similar “stay the course” messages. It seems very likely they won’t be cutting rates at their meeting coming up on March 19-20 and probably not in late April. One sour note for markets last week was the Institute for Supply Management’s (ISM) manufacturing activity report. The number came in substantially below expectations, falling from its 18-month high of 49.1 in January to 47.8 in February. (Readings above 50.0 indicate economic expansion.) The combination of the core PCE numbers and manufacturing activity report pushed the yield on the benchmark 10-year Treasury note to its lowest intraday level since Feb. 13 by the end of last week. Barring any surprises from the Fed (not likely) or unexpected events, the month of March is shaping up to be similar to February for markets. One area to watch: the Red Sea, where attacks against cargo ships have caused shipping costs to rise over 150%. While we probably won’t see the same level of supply chain issues that we saw in 2020-21, higher shipping costs mean higher production prices — and ultimately higher prices (once again) for consumers. That will definitely be a factor for the Fed as they decide whether or not to cut rates in the second half of the year. Coming this week Fed officials are still on the speaking circuit this week. Chair Jerome Powell will be testifying to Congress in the middle of the week, while six additional officials are scheduled to talk. We’ll see the latest employment data this week, with job openings released on Wednesday and the Bureau of Labor Statistics’ (BLS) nonfarm payrolls and unemployment rate on Friday. Other data this week includes factory orders and ISM services (Tuesday), wholesale inventories (Wednesday) and hourly wages (Friday). |
Patrick HueyPatrick Huey is a small business owner and the author of two books on history and finance as well as the highly-rated recently-released fictional work Hell: A Novel. As owner of Victory Independent Planning, LLC, Patrick works with families and non-profit organizations. He is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Advisor in Philanthropy® and an Accredited Tax Preparer. He earned a Bachelor’s degree in History from the University of Pittsburgh, and a Master of Business Administration from Arizona State University. Archives
August 2024
Categories |
RSS Feed