2023 End-of-Year Economic Update

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Andrew Opdyke is back with us to get his insight on the broad economy. He’s been on our show multiple times, and he’s returned with his 2023 end-of-year economic update that everyone should listen to at least once.

Whether you’re trying to secure your retirement or in the middle of retirement planning, it’s always important to keep a pulse on the market.

October-November 2023 Economic Update

October was an interesting month due to the conflict between Israel and Palestine, and inflation remaining stubbornly high. Economic data came in stronger than anticipated, but there were still some concerns.

November 1st, the Fed’s meeting was a sigh of relief for many when they announced that maybe they’re “done” with trying to tame inflation. Perhaps rate hikes may remain on pause for now.

Rate easing may be ahead in 2024, which is what a lot of economists are hoping will occur.

However, as anyone who follows the market knows, just two weeks prior to these reports, there were just too many concerns that inflation may last a little longer. We just don’t have all the data yet to say if 2024 will see interest rates fall, stay the same, or even go a tad bit higher. Right now, as of mid-November, the New Year looks promising.

We’ll need to watch the data to better understand the ebbs and flows of the market right now.

Concerns of Investors Outside of the Magnificent 7 Stocks in the Market

When looking at the S&P 500, it has performed well this year when you include the stocks that are the “magnificent 7.” What are these stocks? They’re high performers that carry the market and include big names:

  1. Alphabet
  2. Amazon
  3. Apple
  4. Meta
  5. Microsoft
  6. Nvidia
  7. Tesla

If you remove these seven stocks from the market, you’ll notice that the market is down in an equal weight market. The percentage of companies beating the index is at a 20- or 30-year low. Equal weight provides a better picture of what’s transpiring in the market, which would show most stocks are either flat or slightly down.

How much are people paying for the top 10 companies in the index? Many investors are paying a multiple of 25 to 30 for these ten stocks and a multiple of 17 for others.

What does this all mean? The top stocks need to continue performing well for the overall market to recover. Andrew would like to see a broader market rise, in which dozens of stocks are lifting the market, and believes that it will take some time to materialize.

Will the Economy Land or Take Off?

Soft landing. Hard landing. A lot of terms are thrown around for the economy and how it will end up after the pandemic and the high level of inflation that we’ve seen. Some economists are of the mindset that the economy won’t land but will take off.

However, Andrew believes that we’re likely to see a soft landing.

What we saw in the third quarter is that companies have excess inventory, which is due to a slowdown in production after COVID. Companies purchased a lot of inventory due to supply chain issues and are likely to:

  • Slow spending over the next 3 – 9 months
  • Avoid some growth initiatives due to high-interest rates

Will we hit a recession? Who knows? A recession has been six months away for 18 months now. Companies are buying less, building is slowing and if we do go into a recession, there’s a good chance that it will be very shallow.

We need to get back to sustainable interest rates without outside influence and stimulus.

Entering into 2024, we should start to learn more about the strength of the markets and economy without any outside influence building it up.

Building an Investment Portfolio to be Recession-proof

If we enter a recession, will interest rates still remain high? Look at companies that have sustainable cash flow, because even Apple must pay the high interest rates of today when they take out a loan and they add tens of billions in free cash flow quarterly.

Investors will want to dive into balance sheets and see which companies can fund their own projects without loans.

You should also look at:

  • Smaller companies with healthy cash flow
  • Exposure to small- medium- and large-cap stocks
  • Potentially add international stocks

Recalibrating your portfolio to deal with the unknowns and still have exposure to potentially risky technology.

Hamas and Israel Conflict

The United States has been sending money to Ukraine and is now funneling money to Israel. Ongoing events like these play into how the economy will look in the future.

The main risk of this new conflict is in the energy markets.

If Iran or others enter the conflict, it can lead to higher energy markets and a further rise in inflation. Economic repercussions of the Israel and Hamas war are likely to be a lot less than even Ukraine and Russia.

Trade conflicts and fracturing are occurring, and the US is doing a good job by determining who our strong trade partners are and reallocating our investments to these countries. We’re importing less from China and are trading more with:

  • Canada
  • Mexico
  • Japan

We have shuffled back and pulled away from China, pushing them from the first to the third trade partner that we have.

AI and the Hype Around It

Cryptocurrency was a major trend in past years, followed by blockchain. Now, we’re seeing a lot of people harp on the idea of AI. We’re at a point where we were with the Internet first coming about, where companies knew that the landscape of the way we work was changing.

What does AI mean for us?

The environment and world are changing. Some professions may become obsolete, and some new jobs may be created. If you look at the top 10 companies in 1999 and today, only two remain: Microsoft and Exxon.

AI may be won by the biggest companies, but if history repeats itself, we’ll see some companies born out of AI that may change the world. We may see the next Facebook or Meta created, and it may be a company everyone is overlooking.

What are you Most Worried About?

Geopolitical issues that are popping up, and more are likely to be added, are a major risk to the economy right now. China is likely to see a more difficult path in the next 10 – 20 years. We’re also entering an election year, and the negative side of the election can cause market fluctuations.

Escalation of Russia and Poland, Iran entering the Israel and Hamas war or China invading Taiwan can all effect the economy. 

What are You Most Excited About?

AI excites Andrew, and he believes that while the technology is likely to change the world, in the next 24 – 36 months, we may see some major changes thanks to AI. Humanity is “fighting the fight,” with more people being literate and doing some amazing things.

We’re seeing how dementia has been in decline in the last decade, and as a whole, we have more people than ever trying to solve problems that have plagued the world around us.

Andrew is unbelievably excited to see how human potential is being unleashed.

Need help reviewing your retirement plan? Schedule a free 15-minute call with us today.

April 24, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for April 24, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast -2023 1st Quarter Economic Update

Learn why you shouldn’t worry about the US debt ceiling and its impact from a market standpoint. You will also learn why inflation might last longer and cause a recession if the federal reserve doesn’t prioritize the inflation fight.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – 2023 1st Quarter Economic Update

Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

CLICK HERE TO READ THE BLOG

2023 1st Quarter Economic Update

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Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

And now, at the end of Q1 2023, we’re asking him the same question. A lot has changed in the last quarter that everyone in the middle of retirement planning or in retirement must keep up to date on. P.S. You can also listen to this episode of the podcast here.

Major Points of Interest in Q1 2023

The first quarter of the year started off with a lot of unknowns. Fear of a recession and inflation were hot topics, and now, we have some clarity going into Q2. The year started with high inflation and questions about the Fed raising rates. 

  • How much will the Fed raise interest rates?
  • How long will rates stay elevated?

Finally, we’re seeing some break in inflation. Jobs also came in strong, although the numbers are starting to slow, and we still have a little time before GDP figures are released. We are noticing a divergence in the goods and services of the market.

If you remember, during COVID, the focus seemed to turn to goods.

The goods side is moderated at the moment and may even be in recession territory. However, the services side of the economy is picking up the slack and performing very well. The question on the Fed’s mind is why hasn’t inflation come down yet? And when it does, will economic growth be prioritized or inflation?

No one knows for sure.

On the market side, things are looking up. Many of the companies that struggled at the end of 2022 are leading the way in 2023. The question is whether the market can sustain itself.

Bank Situation in 2023

A lot of people reading this remember the financial crisis, but the new banking issues center around the US Treasury. The Treasury has been known to be one of the safest investments that you can make, but banks got hit from holding assets in an environment with rising interest rates.

Even banks like Silicon Valley Bank, which no one really heard of because the average person didn’t bank with them, have been hit. That’s because Silicon Valley Bank offered loans to many companies that thrived during COVID and sort of fizzled out or was less attractive after COVID.

Small and regional banks started to tighten up lending activity, leaving many small- and medium-sized businesses with less funding after the debacle with Silicon Valley Bank. Tightening in these banks led to a sort of “additional Fed hike” for non-public or large companies.

Larger entities work with major lenders, which are less impacted by the banking situation.

  • Hire
  • Invest
  • Expand

Andrew doesn’t believe that the banking side of things will be long-lasting. We will see the effects of these issues over the next 3 – 6 months as the banks pull back. The result? That’s what we’re unsure about. Growth may slow due to these banking issues. 

US Dollar and Losing Its Place as the Reserve Currency

For 200 years, the US dollar has been the world’s most important currency. International transactions needed the US dollar when trading. The world’s most stable currency becomes the reserve currency status.

The US benefits from being the reserve currency in a few ways:

  • Keeps interest rates lower
  • Higher demand for debt
  • Easier ability to trade on international markets

Every few years, we hear that the USD will fall out of being the reserve currency. This time around, China and Brazil made a deal, and China asked for the payment to be made in the Renminbi. Another deal in the Middle East requested the same, and this has led to speculation that the Renminbi will overtake the US dollar as the reserve currency.

If this happens, it will lead to:

  • Higher interest rates
  • Consumer impacts

Every few years, we hear this same story of the USD losing its reserve status. Even with these changes, over 60% of international reserve balances are held in USD. Between 60% to 80% of international transactions are in the US dollar.

China accounts for around 2% of transactions, primarily because businesses do not trust communism for their reserve currency.

Debt Ceiling Concerns

The US has printed a lot of money in recent years, leading to major concerns about being able to service the debt. While the US has a lot of debt, the numbers do not show the full picture without looking at both sides of the balance sheet.

On both the corporate and consumer sides, we’re at or near all-time debt levels.

We’re also at all-time asset levels, too. However, how much GDP percentage does it take to service the debt? Roughly around 1.9% of the GDP is necessary to pay these debts. In the 80s and 90s, we paid about 3% of GDP.

The balance sheet is in a better position now than in the past. 

However, we should raise our debt ceiling and pay our debtors. A US default is unlikely this year, and these talks will swirl again in a year or two because it’s very interesting and sells a lot of advertising to media viewership. 

What is Andrew Worried About in 2023?

A major concern is the Fed and if they will remain hesitant in the inflation fight. If the Fed remains slow to ease inflation, Andrew expects a recession in Q3 or Q4 of 2023. He does point out that not all recessions are created equal, and he thinks it will be like the 1990 – 1991 recession.

What is Andrew Optimistic About in 2023?

Progress is taking place in the market. He expects earnings to remain around the highest levels in history. Production and output growth are expected to pick up once the Fed gets inflation under control.

The service side of things is expected to keep the economy running.

In the second half of 2023, the economy is very likely to slow, but it will strengthen the economy going forward.

Andrew does believe that market volatility will occur towards the end of the year and in 2024, rate cuts will begin. The net effect is a short recession, and the market will be roughly flat by the end of 2023.

If Andrew is right, the US economy will slow down and then pick up steam in 2024. Overall, he is confident that next year will look a lot better in terms of production and growth.

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Federal Reserve and Inflation

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The Federal Reserve and inflation are something that everyone is dealing with, from the gas pump to food prices at the supermarket. Of course, if you’re a retiree on a fixed income, your major concern right now is ensuring that you have enough money to pay for your everyday needs.

We’re going to discuss a lot of key issues in this article and how you should think about these topics rather than listen to the doom and gloom you’ll hear in the media.

What are We Talking About When We Say Inflation?

Inflation is occurring across the world right now, and when we say “inflation,” it’s best to look at some of the bigger items that are being affected right now. However, before we provide a few examples, it’s important to know why inflation is happening right now.

Unfortunately, the pandemic is the main driving factor of inflation. For example:

  • Stores and shops closed down
  • Material shortages began

A snowball effect happened with these two points, and then government spending increased, causing what is now an inflationary period in our economy. Many areas of your daily life are experiencing inflation and rising costs, but some of the most noticeable include:

  • Transportation: Car prices are high, primarily due to high demand and a low supply. 
  • Fuel: Gas and heating costs are rising due to inflation and what’s happening in Ukraine.
  • Grocery: Food prices have risen drastically in the past year due in part to supply chain issues and rising food costs.
  • Housing: Almost across the board, housing prices are much higher than they were a year ago, even in areas far outside of major cities. Low mortgage rates, the tight housing market and other factors impacted the housing market. Even rental prices are going up, sometimes significantly.

With all this in mind, the Federal Reserve is working to bring inflation back down to modest levels.

Understanding the Federal Reserve’s Approach to Inflation

The Federal Reserve has been adjusting interest rates to help fight inflation, but what does this really mean? When you raise interest rates on money that people will borrow, you restrict buying opportunities.

For example, if a person is looking for a new car, they’re far more confident with their purchase when it’s at a low rate. However, raising interest rates slows demand because customers aren’t going to be confident with their purchases.

Since supply is low, the lower purchases will allow inventories to build back up and leads to:

  • Lower prices
  • Lower profits for businesses

If we go back to the pandemic, there was too little supply and demand for cars. Car dealerships raised the prices of some cars by $10,000 – $15,000, and the increase in price was all profit. Many vehicles remained on the lot from before the pandemic hit and even used car prices skyrocketed.

Since people still needed cars and bought them, there was no incentive for dealerships to lower prices back to normal rates.

Even with buying a house, if you look across the country, people were paying higher than the listing price and bidding wars occurred. With higher interest rates, maybe buyers will pay the asking price or below on a home and bring the market down to more affordable prices. 

The Federal Reserve is in a difficult position because they need to:

  • Pull back on inflation
  • Experience a soft “landing,” where the economy is still growing

Sometimes, rising interest rates will cause a major recession, but the Fed is trying to hit the “soft” landing mark to make the impact less dramatic.

How Retirees Can Adjust to Inflation

Retirees have a little more control than a non-retiree because they are less susceptible to inflation. In most cases, these individuals:

  • Already have a home
  • Already have a vehicle

You can choose to stay out of the market until inflation and the risk of a recession passes. If you want to travel, you may want to travel when pricing comes back down. Retirees have more flexibility than someone who is working and tied to a family. You can wait for slow seasons and better travel prices compared to someone who has kids and needs to travel during busy seasons.

Food is one of the areas of inflation that will still impact a retiree.

You may need to eat out less often or change your diet to save some money. Unfortunately, food prices are hitting everyone hard.

When we develop a financial retirement plan for our clients, we account for inflation in the plan. Since we account for inflation, people are impacted less than someone who is just playing the market.

Inflation isn’t a new thing, and in the 70s, the Fed raised interest rates to help tame inflation. However, the Fed raised and cut rates over and over again without a clear direction. The end result was 10 years of inflation during the 70s that went from 5% to 12%+ inflation before it came back down and then hit 12.5% in 1980.

A lot of our listeners know that in the 70s, inflation was all over the place.

The Fed doesn’t want to make the same mistake. In the last 100 years, inflation has had an average rate of 3%, which is what the Fed is trying to target. We definitely won’t have 6% inflation for the next 30 years.

We’re in a period where there’s a bump in the financial landscape, but we will get through this period. 

Click here for our 4 Steps to Secure Your Retirement video course.

How to Protect Against Cyber Attacks

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Cyber security is of the utmost importance. At our firm, we work diligently to protect against cyber-attacks and prevent our client’s data from being stolen in the process. We recently had the pleasure of speaking to a cyber security professional named Jamie Ramirez, who walked us through the steps of reducing the risk of threats.

While he works primarily with businesses, his points are helpful for everyday folks. After all, everyone is using the Internet more now than even three years ago.

If you’re in the midst of retirement planning and trying to secure your retirement, the last thing you want is for someone to hack into your financial accounts or steal your identity. Diligence is critical here, and we’re excited to bring this interview to you today.

Securing Transactions to Secure Your Retirement

Jamie, the owner of Preventor, is a cyber security professional who created the next generation in ID verification and financial crime risk management. Lending his expertise to us, he offers many recommendations throughout our talk.

A Rise in Individual Threats and Risks

The pandemic has led many people to work from home and do more online than in the past. For example, remote workers don’t have the same level of security as they did in the workplace, which employers have more control over.

Jamie states that the pandemic has accelerated threats and a major demand in AI and security services.

The Internet opens opportunities for identity theft and cybersecurity risks.

Cloud computing companies, such as Google Cloud and Azure, have high-end security measures that help protect businesses and their customers. So from an individual standpoint, if you use a service that runs on these platforms, you can have some level of confidence that your data will be secure.

However, when you use a no-name service or something similar, you just don’t know who is on the other end looking to steal your data. As an individual, it’s crucial to ask the service providers you use about their:

  • Security measures
  • Internal security protocols

For example, at our firm, we have a strict rule never to follow a client’s instructions that are sent over email because it’s just too easy to fake an email or gain access to an account and request money transfers.

We perform security and identity checks to ensure the client truly made the request before proceeding.

How to Protect Clients from a Business Standpoint

In our business, it’s possible to perform a phone call verification because we don’t handle thousands of client calls per day. But unfortunately, large companies that have thousands of transactions per day cannot call to verify every person’s identity.

Even when calling a person to verify their information and requests, there’s still a risk that it’s someone close to the person who can answer all of these questions.

Additional methods to authenticate a person’s identity include:

  • Face recognition
  • Voice recognition
  • Requesting specific documents
  • Etc.

From a business standpoint, it can be complex to automate these processes. Technology can only automate some of these steps to protect a business while reducing customer abandonment. Many customers don’t like to go through extra security measures, so it’s crucial to find effective solutions that don’t cause customers to leave your business.

How Consumers Can Protect Themselves 

Consumers must take it upon themselves to protect their identities and ensure that their information hasn’t been exposed. First and foremost, it’s essential to look through account statements and balances to ensure there are no unwanted charges.

Additionally, credit reports can help you find accounts in your name that you may not have opened.

Hackers have become very creative.

For example, you can see this creativity in the way that certain transactions are made or even hidden. Hackers will try and make transactions look normal to the consumer, and when they realize the issue, it’s too late.

Banks may recognize the issue and send money back to the user – when and if the money can be recuperated.

What Preventor Does

Preventor is a risk and identity management platform. The company started by working with financial institutions, but now it has expanded to more industries. Preventor is based in Miami, Florida but works with financial solutions globally.

Wrapping Up

Staying as vigilant as possible as we adopt more Internet solutions requires you to take advantage of the technology that’s available. Don’t reuse your passwords, enable two-factor authentication, and be willing to take advantage of more complex security measures, such as facial or voice recognition.

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Federal Reserve, Inflation and the Economy

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We’ve seen a lot of headlines lately, as we’re sure you have, about the federal reserve, inflation and the economy. At the time of our podcast and writing this, Jerome Powell remains the Fed Reserve Chairman.

One thing we want to make clear is that throughout this article, we’ll be going over recent headlines.

Of course, at the time of reading this, we may have new information or outcomes for these headlines. But the good news is that the information should remain relevant.

What Jerome Powell Being Nominated as Federal Reserve Chairman Means

Jerome Powell is loved by some and not by others. There are two trains of thought here, and these are:

Side 1: People That Like Jerome Powell

A lot of people like Jerome Powell because he likes to print money. He wants to keep the economy moving aggressively, and for some people, they believe printing money will benefit the market.

Side 2: People That Dislike Jerome Powell

On the other side of the spectrum, there are concerns that printing money will cause long-term inflation, which is never a good thing.

Working as a Financial Advisor Through Federal Reserve Chairmen

Since we work with so many people nearly or in retirement, we get a lot of questions from both sides of the argument. For example, some clients want to invest heavily in the market because they believe that Powell will help the market soar, and others want to invest in financial vehicles that rise with inflation.

Our clients want us to forecast the future to try and determine what will happen if Powell is chairman.

For example, a client may ask us:

I’m concerned and excited about Powell’s reinstatement. Can we invest in something that protects against inflation and still reaps the benefits of the market?

Unfortunately, this is a loaded yet common question when dealing with inflation. What we believe is that two things need to be actively managed:

  1. Active investments in the market
  2. Overall retirement plan

Active management is important because trying to predict an outcome for an ever-changing market is a gamble. We would rather not gamble with our clients’ money, so we use the data that we have available at any given moment in time to make smart investment decisions.

Markets and investments can change rapidly in just a day or two, and active management helps our clients avoid major losses in the process.

We have a lot of passionate investors.

For example, some investors learn a lot about a particular company, love the direction and vision of the company’s CEO, and they put all their faith in this individual that they’ll help the company grow.

Unfortunately, there’s a lot of guesswork going into the scenario above that can lead to losses.

Through active management, we invest based on what’s happening now.

If inflation continues to rise and the pressure of inflation exists, we’ll adjust portfolios in three main categories:

  1. Equities, which are stocks
  2. Fixed income, such as bonds
  3. Cash

We recommend putting all three of these categories in a race to see who is winning in today’s market. At the time of writing this, equities are performing exceptionally well towards the end of 2021.

Using a number-oriented form of investing, we recommend:

  • Reallocating investments based on what’s happening now
  • Adjust as required

There are also some sides of the market where people would rather split their investments among the three categories above, so the investor may decide to invest 33% in all three categories and go with the flow.

Instead, we believe active management is the right choice because it reduces the risk of volatility.

Reactionary investing, based on headlines, is not something we recommend. Instead, use data and continue adjusting your retirement portfolio and investments to weather any changes in the market that occur today and 20 years from now.

Events Where Reactive Investing Never Works Out 100%

We’re not going to get political, but when there are presidential elections, there are many people who choose the doom and gloom path. If this Republican or Democrat gets elected, the stock market will CRASH.

Thankfully, these predictions rarely come true.

Making decisions based on assumptions never truly works out how a person thinks. We’ve been through many presidents in the last 20 years. One thing we’ve experienced, and it is rare, is that some people pull all their money out of the market because they believe a new president will cause the market to tumble.

Unfortunately, many of these individuals call us and explain how they wish they didn’t sit on the sidelines because their portfolio may have risen 10%, 20% or even more.

Another scenario is inflation.

Inflation is rising, so a lot of individuals are afraid and believe that the market will flop.

Emotions in the market rarely work out in your favor. As an advisor, we take emotions out of the market and our decisions. For example, even as surges in the coronavirus continue to happen worldwide, the markets remain strong.

Some investors feared that the market would suffer after each surge, much like it did when the pandemic first hit.

Using the data that we have available, we’re not seeing these surges impacting the market, so we recommend keeping money in the market. When the data changes, we’ll adapt our investments to minimize losses and maximize gains.

2020 Events and How We Shifted Money Going Into 2021

In 2020, the S&P 500 fell over 30%, but we did a few things:

  • First, most of our clients were sitting on cash to avoid losses in the market.
  • When reentering the markets, we took it slow and adjusted to the companies winning the race, such as technology companies.
  • January of 2021, we saw a shift where large-cap and technology started to slow and small and mid-cap companies began to revive as the market recovered. Using the race analogy, we adjusted portfolios to include more of these stocks to maximize client gains.

Since this was our first time living through a pandemic, we think we did exceptionally well for our clients and really solidified our thought process that active management is the way to go when investing.

Final Thoughts

We covered a lot in the past sections, and the sentiment remained the same: don’t react over headlines. If everyone could predict the future, we would all enter retirement ridiculously wealthy.

However, we can use the market’s data to make smart, timely investments and portfolio adjustments to avoid losses and ride gains to make the most of our investments as possible.

If you need help actively managing your portfolio or want us to run the numbers to see how we can help you grow your portfolio, schedule an introduction call today.