What’s In Store for 2023?
2023 Q1 Market Commentary…
The $1.7 Trillion bipartisan spending bill pushed through by Congress at the end of the year was a kick to the gut for investors who were hoping we’d see inflation abate more quickly. A leading research company, Hedgeye, describes it best saying, “We remain in a new, higher inflation volatility regime brought on by deglobalization, confounding energy policies, war, and a wholesale disregard for fiscal prudence at a time of record government indebtedness.”1
2022 was a slog of gradual, but continual stock and bond values erosion. With the lone exception being the energy sector, every other U.S. stock sector finished 2022 in the red.2 Unfortunately, bonds didn’t provide any shelter either, as yields spiked in the middle of the year, causing bond values to drop significantly. Let’s call it what it was – a “woodshed year”.
What is the U.S. Debt Ceiling?
Q4 2021 Market Commentary…
What is the U.S. debt ceiling? It’s simply a dollar cap limit that the US Government places on its own authority to raise money by issuing government bonds to continue to meet its obligations like social security payments, tax refunds, interest payments on existing debt, government employee salaries, military salaries, just to name a few. Since 1917, Congress has raised the debt limit 78 times (See Citation 1).
The U.S. government hit the debt limit of $28.4 Trillion (yes, with a T) in July 2 (See Citation 2). In fact, the debt load is a few billion over that as I write this newsletter, and the U.S. Treasury is pushing to get it raised by October 18. Since the U.S. Treasury debt is over the limit, something needs to get done, lest they are forced to default on the payments. Of course, members of congress rarely let that happen. They typical play hard ball with each other and then usually get it done in the 11th hour.
Raising the debt ceiling is not a healthy thing. It’s a necessary evil. With each dollar the government borrows, it steals purchasing power from future generations, and it makes all of us poorer for it. Unfortunately, the alternative is that the government defaults on their obligations. We each know hundreds of people who count on government payments, and no one wants those recipients to be adversely affected by a problem they didn’t create. Beyond the debt, we have other concerns…
What happens when interest rates rise?
2021 Q2 Commentary…
Can stocks and interest rates go up at the same time? Yes, they can, and they often do. Right now, we are in a period of recovery from economic shutdowns across the globe. As companies are forced to raise prices in 2021 and meet a return in consumer demand, we are watching inflation like a hawk. Specifically, we pay very close attention to the 10-year treasury note yield as our sentiment barometer.
First, a quick education on why the 10-year treasury yield matters…
▪ Treasury securities are loans to the federal government. Maturities range from weeks to as many as 30 years.
▪ Because they are backed by the U.S. government, Treasury securities are seen as a safer investment relative to stocks.
▪ Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
▪ The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.
How high can the 10-year treasury yield go before we do see it adversely affect the performance of the stock market? Some economists predict it’s 3%. Others say it’s 2.5%. The truth is that their predictions don’t really matter. What matters to us is the rate of change in inflation data that typically drives the change in interest rates. If the rate of change of inflation is increasing quarter over quarter, it signals a robust recovery is afoot, assuming job growth and GDP are accelerating, as well.
Individual Stocks – Are they for you?
2020 Q1 COMMENTARY:
Contrary to what logic might suggest, the most difficult time to be an investor is when the financial markets are in the late stages of a multi-year upward trend. As we witness market levels hit record highs, the appetite for adding new money to investments can start to wane for fear that the most opportune time to buy has already passed us by. It’s an innate thought process. Since we were little, we’ve all been taught that too much of a good thing is not always a good thing, and it’s a legitimate lesson that I’m sure we’ve all learned multiple times in our lives.