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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When is Cash Good?

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“Cash is king” is a phrase that many people say. And while many people put their money into investments to grow, there are times when cash is a good asset to have. For example, we’re five months into 2022, and with the way the markets have played out this year, cash may be a good option for you if you’re trying to secure your retirement.

Investor concerns this year have shown a lot of people who are getting into retirement planning that there are times when holding cash is good.

When is cash good?

We’re going to dive into this topic and explain why active management is so important and when you may want to hold cash rather than put more money into the market.

When is Cash Good?

Cash doesn’t grow on its own, but it’s a strategic asset that everyone needs to utilize. It’s crucial also to understand that there’s a difference between a passive and active money manager.

  • Passive money managers use a buy-and-hold strategy that doesn’t take the ebbs and flows of the market into account. In a passive scenario, you never hold cash because it doesn’t produce a return.
  • Active money managers continually work on readjusting your portfolio and making changes to negate potential losses due to market fluctuations.

Wait. What Does Going Cash Really Mean?

Before we go any further, it’s crucial to grasp what “going cash” really means. When we go cash for our clients, that doesn’t mean that we have a pile of cash that we tell someone to put under their mattress.

Instead, the cash remains in the person’s brokerage account (IRAs and Roth accounts), but it’s not invested in anything.

So, we may sell of a bunch of stocks and keep the cash in the account until the market corrects itself and you can go back to investing the money. Cash is kept in a temporary hold and can be redeployed when the numbers tell us that it’s safe to go back into securities.

Why Would We Ever Recommend Going to Cash?

Why would you ever go to cash if you’re trying to secure your retirement? Because it’s neutral. Cash is king when other assets are going down and cash remains neutral. For example, let’s imagine that your investments are making 6% – 10% returns per year.

In this case, your investments will beat out CDs and other short-term investment vehicles.

However, let’s imagine a 2008 scenario when the market busted. If you had $100,000 in investments and lost 50%, then you would have $50,000 left. The following year, if your investments were up 50%, did you break even?

No.

You’ll have $75,000, or 25% less than you had initially. If you lose 50% of your money, you need a 100% return to break even. Many investors lost over 50% in 2008, but they would have made money if they had pulled their money out of the market and sat in cash when it was down just 10%.

Why?

Because they would have had $90,000 left rather than $50,000 if they kept their money in the market. In this case, cash protected these investors. You also have $90,000 that you can put back into the market, earn a little over 10% returns, and you’ll be back to even.

For people who left all their money in investments during this time, it took years to get their portfolios back to what they were before the 2008 crash.

Holding Cash is Short-term

When you hold cash, it’s a short-term strategy to protect against losing money. It’s very rare that you’ll sit on cash for months on end, but if the markets continue falling rapidly for many months, holding cash for this duration is a possibility.

The positioning of cash should be used to protect against a significant loss.

In fact, let’s look at an example of holding cash in a real-world scenario.

March 2020 Example

March of 2020 is a prime example of going to cash, and it’s a date that is still fresh in everyone’s minds. The date is when the coronavirus first appeared around the world and really started disrupting the world’s:

  • Supply chains
  • Businesses
  • Workforce

In January 2020, the markets were doing fine, and we really didn’t know a pandemic was heading our way. Sometime in February, we started hearing about a virus popping up overseas, but the month started well. Then, near the end of February, the markets started to drop a little before March, when they really took the market into a downward spiral.

It took just a matter of a few weeks before the S&P 500 fell 34% in March.

Markets hadn’t seen such a steep decline in decades. Many people saw their 401(k) and IRA accounts lose over 34% in value in weeks. What we did was go 100% cash for all our clients. We didn’t hit it perfectly and protect against all losses, but we went fully risk-off by going cash.

The S&P 500 fell 34%, while our most impressive portfolio fell just 9%.

Putting this into real-world figures, if you had $1 million in your investment accounts, you would have ended with:

  • $760,000 if you didn’t do anything
  • $910,000 by going cash

Our data showed that after about 35 days, the markets started to recover, and with $910,000 in cash rather than $760,000, it’s easier to get back to the $1 million, pre-pandemic funds in your account.

Going back into the market was difficult because the news didn’t look good, yet our numbers told us it was time to go back. For our clients, they didn’t suffer from the anxiety of a 34% loss and made a great return on their investment in the interim.

2022 Example

The start of 2022 was also difficult for investors because we started off with a sell-off at the beginning of the year. Then, things started to go sideways for a couple of months. Next, the reality of inflation hit us, and the market became even more volatile.

The Fed also came out and told us that they were going to raise rates, which also caused volatility.

On May 4th, the Fed stated that they were going to raise rates by 50 basis points. That day, we decided to go 100% cash, but the decision was based on indicators rather than the rise in interest rates.

On May 5th, the market fell over 3% and over three trading sessions, the market dipped 6.5%. Our clients sat in cash, didn’t lose 6.5%, and when the data shows us it’s time to go back into the market, we’ll go back in.

We buy when we see demand and sell when the demand goes away. Cash positioning allows us to pad against significant losses in the market.

So, when you’re trying to secure your retirement and are during retirement planning, don’t forget that going cash can be beneficial for you. It’s better to protect against significant losses rather than keep your money in the market when it’s rapidly declining.

If you enjoyed this article and want to listen to us weekly, we invite you to join our podcast.

You can also schedule a free call with us to discuss your retirement plan and learn more about going cash.