All posts tagged: Future Bright

Endure Volatility for Future Rewards!

2022 Q3 Market Commentary…

There are a lot of shoes dropping now on the U.S. economy that we have been forecasting in previous newsletters. Inflation is running hot. Economic growth, as measured by GDP, is slowing. Interest rates are climbing. Supply chain bottlenecks still exist. Gas prices remain elevated. Housing demand is cooling. Residential rental rates are climbing. Consumer credit is at an all-time high. Consumer confidence is weakening. You get the point. The list is long.

When markets are under extreme duress, the one question we all really want answered is “How much lower will the stock and bond markets go before we bottom out?” While we await the answer (which only ever reveals itself in hindsight), we are forced to grapple with the prospect that markets could get worse before they get better. To further complicate matters, we get brief rallies in markets – called “bear market rallies”- that play with our psyches and create more confusion about market direction.

In the second quarter, economic conditions turned on a dime for the worse. There is no sugarcoating it. The stock market showed it. The bond market showed it. In fact, the first half of 2022 was the worst performing first half of a year since 1970. Here are the 2022 first half performance numbers through June 30:

 

 

The Federal Reserve is walking a tightrope between staving off a recession and getting inflation under control. If they raise interest rates into a weakening economy, it can accelerate recession risk. If they don’t raise them, they risk inflation spiraling higher. After more than a decade of “low interest rate, easy credit” monetary policy, investors around the globe are feeling the negative effects of this policy shift.

Unfortunately, asset values suffer greatly from the Fed’s conundrum, and those values may stay in the pressure cooker until inflation subsides significantly enough. It’s not easy to unwind inflation without crushing economic growth. The process can be choppy and stressful, and I would expect that to be the case between now and the end of year.

Allow me to drop a few promising facts to keep you looking at the bright side…

  • Every bear market in history has been usurped by a stock market recovery to new all-time highs
  • Adding to 401k’s, IRAs and Roth IRAs in bear markets offers you attractive entry price points
  • Stock and bond markets often anticipate and price in recessions before they occur
  • The average length of a bear market is 11.3 months while the average length of a bull market is 4.5 years (*1)

In 1997, I was driving up Interstate 10 in Arizona and saw a vanity license plate that read “Dow 20K”. It seemed like such a stretch to me then since the Dow was barely trading above 7K at the time. Look at where it trades now. We’ve lived through a tech bubble burst, a terrorist attack of 9/11, the financial crisis of 2008, the COVID crash of 2020, and we are in the middle of another one. Yet, we’re still north of “Dow 30k”.

Investing requires fortitude. As investors, volatility is what we must endure to gain future reward. Don’t let the short-term economic events of today derail your long-term vision for your financial future.

Source (*1): First Trust – History of Bull and Bear Markets

Future BrightEndure Volatility for Future Rewards!
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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…

• Will the $3.5 Trillion infrastructure bill get passed in Congress?
• Will higher inflation be transitory or here for a longer period?
• How much will the supply chain shock delay or reduce future earnings of companies?
• How will future employment numbers be affected by the corporate vaccine mandates?

As investment advisors, we grapple with questions like these constantly. Our only practicable response is to revert to economic data as it relates to outcomes of these uncertainties. As you know, we have adopted the silo method, by which we view the market through the lens of growth (GDP) and pricing (inflation). We spent most of Q3 in Silo 3 (decelerating GDP + accelerating inflation), and the stock market started to show signs of exhaustion in September as the S&P 500 Index 4.8% (See Citation 3) of its value.

If forthcoming GDP re-accelerates, it might indicate that the recent market swoon was episodic and not a reversal of bullish trend. The combination of accelerating GDP and accelerating inflation would put us back in a reflation condition (Silo 2), and that could be positive for stock prices. However, if GDP continues to decelerate, we could be in for a bumpy ride in Q4. When we get higher prices on goods and services amidst a period of lower economic output, future corporate earnings suffer. If economic recovery becomes less certain, investors get uneasy and market volatility appears. Let’s hope the post-COVID recovery data in October surprises us to the upside.

Citation 1 – https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling
Citation 2 – CBO.gov/publication/57371
Citation 3 – Yahoo Finance: S&P 500 Index Historical Return data

Future BrightWhat is the U.S. Debt Ceiling?
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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.

When inflation becomes too large of a problem to ignore, we typically see it unfold. Take the current housing market, for example. There are hot pockets in this country where new and existing home prices have been climbing double-digits for three years running. The FOMO on low interest rates coupled with tight supply and rapidly rising prices on homebuilding materials are creating a perfect storm for a severe housing price correction, or worse yet, a crash. Translate that to the rapid rise in prices of technology stocks or “Covid-Friendly” stocks, and there is similar risk. We don’t see it in the data right now, but the risk is always present because the data can change quickly.

All signs are pointing to a strong economy in Q2. As quarterly earnings start getting released in mid-April, we’ll likely see the companies negatively affected by COVID at this time last year crush their prior years’ results. Will that recovery strength be broad enough and strong enough to fight the inflationary price wave coming? Again, we don’t know until the data shows us. What we do have to go on is the data in hand (GDP accelerating, Inflation accelerating), and we’ll continue to maintain positions we deem as favorable to own under those conditions, knowing it could turn on a dime at any time.

Future BrightWhat happens when interest rates rise?
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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.

Ross AlmlieIndividual Stocks – Are they for you?
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“Race to Zero” is over!

Just a few items to share with you as we dig into this 4th quarter…

The “Race to Zero” is over. Commissions at TD Ameritrade have always been very low relative to its competitors in the industry. I’m happy to report they have now been reduced to $0.00 on all TD Ameritrade stock and ETF trades effective immediately! This is beneficial to everyone, but it is particularly beneficial to those adding regular contributions incrementally to fund Roth IRAs, Traditional IRA’s, SIMPLE IRA’s and SEP IRA’s. The race to zero is over, and investors win!

We’ve added to our team! I’m pleased to notify you that we’ve added two more investment advisors – Matt Johnson and Randall Sidener – to our Future Bright advisory team. Both are longtime friends of mine. Matt joined the firm earlier this year and brings over fourteen years of industry advisory experience along with him. He’ll continue to operate out of Detroit Lakes. Randall will join be joining in mid-October. He is an industry veteran in the mutual fund wholesaling business, having spent the last thirteen years with Integrity Viking Funds out of Minot. Randall will be joining me at our office in Moorhead.

Ross Almlie“Race to Zero” is over!
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What a Difference!

Wow, what a difference a year makes. Last year at this time, there was a fear that the economy was overheating and in need of continued interest rate hikes from the Federal Reserve. The 10-year U.S. Treasury note had just hit 3.25% and the service sector strength as measured by the ISM (Institute for Supply Management) measured its highest read in history.

Fast forward one year, and here we sit with the 10-year note sitting at 1.54% and growing fears of a recession. With a yield curve inversion, a trade war with China and other countries, and overall investor exhaustion from the daily deluge of news that moves markets some days and falls on deaf ears on others, it’s pretty remarkable that the market has maintained these levels.

Ross AlmlieWhat a Difference!
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Stock Market Volatility… How do you cope?

Stock Market Volatility
How do you cope?

It’s no secret that the sustained generational low levels in interest rates have helped the stock market climb to near record highs over the past decade. Many would assert that the record rise in stock prices is artificially propped up under monetary policy decisions that have forced savers to take on more risk in order to find more acceptable returns. Nevertheless, for those of you who have not let volatility of stocks shake you into making bad decisions, you have been rewarded for sticking with stocks despite the general public’s irreverence towards them. Low interest rates have certainly played a part in your success, but not all of it.

Many people view stocks in the context of “how long will the party last?” It’s a rational thought, especially if you’ve lived through some vicious downturns like 1987, 2001, and 2008. Yet, underneath the shadows of some pretty dreary market conditions, transformative technologies still emerged amidst the wreckage, and they don’t get enough credit for the role played in the economic recovery and subsequent rise of the stock market. Apple, Google, Facebook, Netflix, and Amazon are the sexy names that grabbed the headlines, but what about the likes of Nvidia, Intuitive Surgical, Lululemon, and Regeneron? They are just a few lesser known names that have played a part in the market’s rise, and I could name several more!

Ross AlmlieStock Market Volatility… How do you cope?
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