Transcript

Wiser Financial Advisor – Halftime Financial Report 2023

Hi everyone, welcome to the Wiser Financial Advisor show with Josh Nelson, where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, founder and CEO of Keystone Financial Services. Let the financial fun begin!

Josh: Welcome, everyone, to the Keystone Financial Studios. Today I’m here with Jeremy Bush. We are your Certified Financial Planners (CFP). The CFP is the gold standard in our industry. That’s the one you want to look for when it comes to working with a financial planner or advisor. That’s the one that tells you we’re board certified. And today we’re going to be giving the halftime presentation. We’re going to talk about a few different things. One of those is the economy. Certainly there’s no lack of information out there. I think that’s why we still have jobs—because there’s too much information and a lot of it contradicts itself. And so we’ll give you our opinion. We’ll tell you what we think about where we are so far for the year and what the experts are saying as well. Then Mr. Bush will get into the financial markets, which are surprising in a good way. We’ll also be talking about what may be ahead.
Before we do that, here are our disclosures. These are just our opinions and we don’t know what’s going to happen in the future. It should be comforting to all of you that nobody else does either. So these are our opinions and our research. Our job is paying attention to where our clients want to be financially and doing our best to help them get there, safely and as comfortably as possible.
I’m friends with a number of airline pilots and I’ve talked about turbulence. We use that metaphor a lot for financial times. Often, there’s not a smooth ride. So again, that’s why we have jobs, because things change constantly in the financial world. I think this is the longest predicted recession that we’ve ever had. If you’ve been paying attention to the news given out by the financial media, it seems like all the time over the last year and a half, they’ve been saying, “Hey, there’s a recession coming, there’s a recession coming.” And it just hasn’t come. That doesn’t mean it won’t get here. Going back to 2020, I remember distinctly when we gave our forecast presentation in January. And that was right about the time that we first heard the term pandemic being touched on. But soon, the entire economy shut down globally. It wasn’t just in the US. The entire economy shut down, and so you can see we had a bad recession. It was very sharp. Recession and then very quickly things started bouncing back because the Fed and the Congress, at least in this country, responded in a really big way in the trillions of dollars.
We saw this big drop, this big bounce back and we’ve seen a little bit of up and down over the last few years, but no recession. So it’s pretty interesting. There were $8 trillion plus dollars injected during the pandemic by Congress and by the Fed. And at the same time, supply was being contracted. You might remember supply chain issues. The result of that was too many dollars chasing too few goods, which caused a big inflation problem. And the Fed was very, very slow to respond to that. From 2020-2021, there were no rate increases. They kept rates at zero, to try to keep us going. But then they waited and waited and waited, even calling inflation “transitory.” You might remember that word being used. They said inflation is spiking but it’s transitory. It was not transitory, and in fact they recognized that later on and responded with the huge rate increases we’ve seen in 2022 and 2023, which have gone from basically zero up to five. We just saw a rate increase yesterday. So now that is 11 rate hikes in 15 months, which is very aggressive because they are trying to make up for lost time. They really should have started doing it incrementally earlier on.
Now inflation has been coming down. Back in 2022 and 2021, we were feeling the majority of the inflation pressure, the pain in our pocketbooks, with our money not going as far, not buying as much. So the big jumps that we saw earlier on in energy have abated. Energy prices in general have dropped way off now. So that’s had the biggest impact as well as food supply chains have gotten better. But inflation is still there, it never goes away. There’s only been one time period back in the 1930s that we had any kind of prolonged deflation. Deflation is not a good thing either. You don’t want deflation, that means your economy is going backwards in a bad way.
The Fed is still raising rates, and mortgage rates have started coming down. So it doesn’t exactly move in lockstep. The whole reason the Fed hikes rates to begin with is to slow a booming economy and prevent overheating. Consumers are out there, they’re spending money, they’re on the roads. So it doesn’t look like a recession because people have money in their pockets, they’ve got jobs, and they’re certainly spending money right now. The bond market also does not always move in tandem with the Fed. Last year was a terrible year for the bond market. Most of our clients have bonds as part of their allocation. It was very unusual to see that kind of a drop in bond prices with the spike in the Fed rate. So they really rocked the economy by being so aggressive because they’re trying to play catch up from when they mistakenly kept rates low.
So why is the Fed pausing or why have they slowed down the rate increases? Part of that is because we had three banks collapse earlier this year. People got concerned about smaller banks, regional banks, credit unions. There was concern about uninsured deposits. Many consumers were shifting money. There were only three banks that made individual bad decisions along the way. They made some big blunders in their risk management. It did not spread to the rest of the banking system, thankfully. But certainly a few months ago, that was an important thing that was being watched, and the Fed basically stepped in. They provided a lot of liquidity into the banking system, which quelled the fears that were there. Also because of that, bank lending standards tightened up, and loans are harder to come by. They’re not taking as many risks on loans with questionable credit situations at this point.
So how will the economy land? We’ve talked about soft landings and hard landings. Sticking with our airplane metaphor, what are we looking at here? Soft landing or hard landing? In a soft landing, economic growth slows and then picks up. We won’t have a recession. Economic growth may be steady or pick up after that and the Fed would hold steady or actually lower rates. That’s what we’re going with right now. We believe that it’s going to be a soft landing at this point. Evidence for that continues to come in. In fact, this morning they just reported GDP numbers were better than expected and the numbers we saw from inflation a few weeks ago were better than expected. Inflation is dropping in a pretty meaningful way. It’s getting harder to make the case for a hard landing at this point.
Jeremy: Soft landings have historically been very difficult to do.
Josh: Right. They have been. And although the Fed blundered along for a while, they’re certainly committed to not having inflation be out of control. That’s very clear. At this point, they’ve gotten very aggressive. They’re not going to let inflation go back to double digits again like we were seeing last year. So a hard landing would be making the case for economic growth to be contracting in a major way and inflation dropping off a cliff, if not into deflation, into an outright recession. Evidence of that would be consumers pulling way back on spending, largely because they’ve lost jobs. So right now we’re still at 3 1/2% unemployment rate. That’s one thing we’re watching closely, asking if there are big increases in layoffs and people leaving the workforce. We’re not seeing that right now. Unemployment is staying steady at this point. That’s not to say that people don’t lose jobs, but structurally that’s part of the economy. So there is always some company laying people off and some other company hiring. Overall, as we’ve talked to business owners and managers, the number one thing they’re complaining about is that there aren’t enough workers. There aren’t enough people to do the jobs that are open, right? So we continue to see faster wage growth because of the low unemployment rate. As employers, we’ve had to get competitive, making sure we’ve got good benefits and pay and so forth to attract and retain good people. But there have been fewer new jobs, so it’s a little bit of a mixed bag. It’s always a bit of a mixed bag when it comes to economic data, but right now we’re still making the case for the soft landing looking like the better bet.
Manufacturing has pulled back globally some, but at the same time we’re seeing the service economy pick up. So it may be that those sectors are just canceling each other out right now. Another thing I wanted to mention here is housing. A lot of people ask about that. In housing, we certainly saw a big pull-back, although a lot of you say, “Wait a second, we just saw these big property tax increases this last year.” Remember that you’re always a year behind the county when they’re doing their assessments on what your house might be worth. So it’ll be interesting to see what happens this next year. We might see some declines in prices. We might see a little bit of relief there, but you’ve got limited supply, and you’ve got homeowners who don’t want to move because they’ve got a two and a half, 3% rate on their mortgage. Nobody wants to give that up when they’re looking at going out and getting a 7% mortgage. That’s a lot bigger payment or a lot less house that you can buy. So a lot of people are just sitting tight at this point. They’re not moving around, but at the same time, you’ve got millennials wanting to buy houses. And the millennials by population is bigger than the baby boom. So you’ve got a big under-supply right now. That’s one reason why we think we’re gonna see prices pick back up. There’s some stability there and not enough houses being built. Some of that was because of supply chains, cost of building materials. It’ll be interesting to see what ends up happening in the next few years, but I think there’s a good reason to believe real estate is going to pick back up.
Another possibility is neither a soft landing nor a hard landing. What if we just kind of putz along and land in stagflation? That would mean that we have slow economic growth, but no recession. Inflation spikes and tapers back off again. Steady consumer demand, which is a good thing. Then rates would stay higher, move higher. That’s possible. We saw that in the 1970s. Actually, that was largely what stagflation was that decade, just kind of going back and forth. The economy wasn’t in an outright recession, but it kind of felt like it because inflation was so high. This time, I think the Fed is committed to nipping it. They probably would go for a hard landing, as opposed to letting inflation take off. The Federal chairman actually mentioned that he wants to be seen as a Paul Volcker type character, who came in and killed inflation in the early 80s. At the same time, killed the economy. So, inflation is kind of like cancer, in that if you’ve got cancer, you’re probably gonna have chemotherapy and radiation. Certainly that can kill cancer, but it can kill the good stuff for a while too. And back then, we saw huge spikes in the unemployment rate. We’re hoping that stagflation is not a thing, and we think it’s pretty unlikely that that scenario is going to play out in this case.
Jeremy: Going over to financial markets, where are we as of today? What we saw last year was pretty rough. Everything bottomed out on October 12th of 2022 and since then, technically we are in a bull market, which is basically just 20% up from where that low was. Over time it has been a fairly steady climb. We are technically in a bull market, so what does that mean moving forward? If we look at the last 13 times that we’ve climbed out of a bear market, 10 of the 13 times, after a low, the next six months were good months. So we had continued increases, continued growth to new highs.
The thing that makes this one a little different is the number of trading days to renew the markets. It took 164 days from October 12th, 2022 to get us technically into that 20%. And there was some pretty big volatility, big spikes up, big spikes down. It almost felt like we were taking two steps forward, one step back. We had banking stuff that was happening. Those three banks that collapsed raised a lot of uncertainty. The Fed continued to raise interest rates and nobody really knew whether they were nearing the end or if they would keep pushing rates higher. I think the numbers are on our side. We might wonder if we’ll be hitting a new low, but from the data we’re seeing, it doesn’t really look like it at this point. The next six months look fairly decent.
Josh: It’ll be interesting to see what ends up happening. There could be bad stuff out there that we don’t know about. It may hit, it may not. That’s always one asterisk we want to throw in there, but the odds are pretty darn good that that we’re going to see this continue and this is not a flash in the pan.
Jeremy: Historically, a strong start to the year for the first six months usually means a pretty darn good next six months. On average about an additional 7% upon whatever our gain was for the first six months, with 5% on average over the year. Technically, I think the first six months we were actually in that 10 to 15% column. Not too shabby. and better than we expected.
Josh: There were a lot of the naysayers saying, “The market is going to crash; we’re going to be in a terrible recession.” That just hasn’t materialized. The evidence continues to point more and more to that NOT happening. There could be a mild recession, but it’s probably not going to happen in the next 6 months. The consumer is so strong right now and unemployment is so low, knock on wood, it would take a pandemic type thing, I think, to throw things off that badly.
Jeremy: In the first six months too, naysayers were saying, “Well, yeah, there’s this growth, but it’s only a few companies that are really leading, the way. “ And most of those companies were tech companies. A few companies were leading the way, largely by AI and tech stuff, but that has broadened since then. Tech usually tends to lead the way, but other companies catch up. And so if we take tech out of the S&P 500 and see where everything’s at, overall valuation on the S&P 500 is fairly average right now. It doesn’t mean that it’s overvalued, or undervalued. It’s actually pretty healthy.
Josh: I think we’re right at the 20 year average right now. If you think about technology in general, the tech sector always tends to run expensive historically, not to say that it couldn’t pull back, but I think that also makes the case for diversification. You want to make sure you don’t have all your money in one sector. That’s the temptation. People get tempted to jump. Last year, the only sector that went up in the S&P 500 was energy. Everything else was down, so some people could have gotten tempted to jump. We didn’t, of course. But people can get tempted to say, “Well, why don’t we just put all of our money in energy stocks; all this other stuff is going down in value.” Well, now it’s just the opposite, right? Energy stocks are dropping year to date. So that’s why you want to stay diversified and keep your eggs in different baskets. Don’t put everything in one.
Jeremy: The things that have done well through the first six months are information technology, communications and then energy utilities. If we looked at these sectors last year, they would have been flipped. So again, not putting all our eggs in one basket, we’re going to stay diversified. This is the exact reason why we do that. Six months ago, if you would have said, ”What’s going to be doing great in the next six months?” I don’t think either one of us would have picked information technology. I don’t know many people who would. So really, a mixed bag of things.
A lot of what we deal with on a daily basis is market perception. This is where statistics can get kind of wild. Technically, first quarter earnings and second quarter have declined year over year, but they were still better than expected. So when expectations are low, you can have decline in earnings, but that can still be a good thing. So if we really look at it, 70% of the S&P reported better than expected earnings. And so much of the market relies on sentiment, right? It relies on us trying to project what’s happening next. It tries to price in what it expects is going to happen. And then when something is better than expected, the market says “Yay, that’s great.” It’s still not very good, but yeah, it’s great. So it’s this stuff that we get to deal with on a daily basis, that makes our job interesting. Overall, what we’re seeing is some pretty good broad strokes. So, 8 of 11 sectors year over year revenue growth, that’s fantastic. And 11 1/2% of blended net profit in the S&P 500.
Josh: Not terrible by any means. The stock market in and of itself, and the markets in general, are kind of a prediction mechanism. So if you see the stock price of a particular stock today, what that really reflects is the earnings expectations over the next 6 or 12 or 18 months. The stock market is difficult to predict–because in itself it is kind of a prediction mechanism. Every millisecond when things are trading, the reason things are trading the way they are is because everybody is trying to outguess and predict where things are going in the future.
Jeremy: One thing you might be hearing, some of which can be confusing, is that the money supply is contracting. So depending on where you get your news from, you might see this. It can be one of those red flags when they say the money supply is contracting. Well, what does that mean? Your money supply is just basically the cash that you have. And there are two levels of it. There is the cash you have in your bank right now, the stuff you have in your pocket that you can sell within a day and go spend. And what they’ll say to raise the alarm is, “Oh no, the money supply is contracting,” and “Oh no, this happened four times over the last 150 years and each time there was a depression.” But when we look at this and listen to smart people out there who are tracking this stuff, we look at the fact that the money supply has never been as high as it was over the last year. A lot of that is the stimulus money that went out. We created 25% of our overall money supply in about two years! So, obviously it was going to be really high. That’s been needing to come back under control a bit more. Really, we’re more back to average. So yes, technically the money supply is contracting, but that does not necessarily make this a bad thing.
Josh: Right, and you have to look at all these data points in the context of everything else. You’d think the smartest people like those in the Federal Reserve would have all the information and be able to make all the right decisions, but they screwed up when it came to calling inflation and how bad it was going to get.
Jeremy: Consumer spending is still strong. So all that money that was thrown out there has created excess savings. There is still a ton of excess savings out there, excess meaning more than average. Some of that has been spent down. People are still spending down money. But we’ve said it before, we’ll say it again, “Seventy percent of our economy is people like you and me spending money.” That’s another thing the Fed is taking into account; that people are still spending money, which is why I think they’re still into raising rates more.
Josh: And even though inflation has come down dramatically, by over half from what it was before, historically we’re still above the long term average by a bit. So yeah, that’s what they’re going to continue watching to make sure it doesn’t get back out of control.
Jeremy: And when we look at the CNBC poll, they just go out and ask a bunch of Wall Street bigwigs, “What kind of market are we in right here?” We’re always going to have a chunk of people that will say it’s a bear market.
Josh: They call them perma-bears.
Jeremy: You’re never going to change their minds, but really, when it comes down to it, the vast majority of people are saying we’re in a bull market.
Josh: Bear Market rally folks are saying ”Don’t think this is real.” They think we’re going to see a big pullback again and retest those lows we saw last year. We certainly hope that doesn’t happen, but unless there’s some kind of a shock event or something like that, it looks pretty unlikely.
Jeremy: Those ones are the ones that have been screaming “Recession” for the last 18 months.
Josh: Right. And in the end, they might be right, especially if the Fed continues raising rates and they go too far. Historically, that’s what they’ve done, which is why a soft landing is so difficult. Oftentimes they end up going too far, and it ends up causing a recession.
Jeremy: The last year was very challenging for bonds. There’s a bond teeter totter. On one side you have the price of the bond. On the other side you have the interest rate. When they raise rates like they’ve been doing, that price of the bond is going to go down. That made the last year and a half fairly difficult because when you rely on bonds to be that downside protection, that makes it rough. Over the last 10 years, bonds have not been super great things to have, in large part because rates are so low. But now what we see is that we’ve weathered that storm. We’ve gone through that raising and raising and we’re seeing rates on CD’s and T-bills, virtually risk free investments that we haven’t seen in over 10 years. Looking forward, bonds should act like we’d expect them to act.
Josh: Yeah, probably no big price declines like we saw last year.
Jeremy: And then eventually what will happen is the Fed will drop rates and when that happens, those bond prices will pop back up. The outlook for the foreseeable future is that bonds should be reacting as we’d expect bonds to do.
Josh: Basically the expectation is you’re going to be earning interest on your fixed income securities. Then sooner or later, maybe next year, maybe even the following year, the Fed will start lowering rates. That will bring on a teeter totter effect. You might see some price appreciation.
Jeremy: And then of course the yield curve remains inverted. All that means is, you wouldn’t tie your funds up in a 30 year bond for 2% when you can buy a three month or a six month CD for 5%. So the yield curve has been inverted for quite a while and some statistics people will come on here and say, “That usually means we’re headed toward a recession, right?” It is correlated, but it’s not a for-sure thing. For the time being, three to six month treasuries and. CD’s are pretty fantastic. You can make 5 plus percent on those for the very short term. Take advantage. We certainly are.
Overall, when we look at the first half of this year’s S&P 500, that’s basically the US Q2 year to date, has been great, better than expected. Europe, Japan and such are all positive too, even emerging markets. Africa, Southeast Asia, are positive as well. So this isn’t just America leading the charge or anything. This is worldwide. And we have our Fed making decisions, but there’s also the European Central Bank, right? Everybody has their Fed and they’re all kind of following suit. Maybe one reason why our numbers are higher than the world average is because our Fed started a little bit sooner and has been a lot more aggressive than the European Central Bank. They’re moving in the same direction, just not quite as fast.
Josh; Diversified investors are probably happy right now. An undiversified investor might be very happy or very unhappy. We’d never recommend somebody to put all your money into the mid cap value but in the mid cap value box, you’d barely have made anything year to date. That’s the case for diversification. It’s not as exciting as chasing tech stocks or AI stocks or something like that.
So what may be ahead? This is always an interesting part of the presentation because we’re talking about the future, and that’s murky as always. So a few things to pique your interest on why we’re pretty optimistic about long-term economic growth, especially in this country, but globally as well.
1. Artificial intelligence. They’re talking about how AI will be able to do some pretty wild things. For example, inject us with nano drugs. Say we get cancer, they’ll be able to inject us with nanobots that are smart enough to find the cancer and change the DNA of the cell from cancerous to non-cancerous. Which sounds like wacko science fiction, but they’re saying they’re close to doing this right now for somebody with Alzheimer’s or Parkinson’s. Imagine how many 100-year plus people are going to be running around in the future and quite healthy too, right? Lots of technologies coming. Tech companies are saying they’re eventually going to be able to transmit smells through our devices.
2. Super app domination. Apps will probably be powered by AI. They’ll know us so well, we’ll be even more dependent on them than we already are.
3. And then finally, virtual power plants. Right now our grid is pretty antiquated and in the future, they’re saying that AI will be smart enough to move energy around between different sources and be a lot more efficient. There’s a lot of waste right now that ends up happening.
Growth projections: Overall we’re expecting that we’re going to continue to seek growth. It may not be as fast in all parts of the world, but prediction is that for this year, global GDP at 2.8%, and next year 3%. It just so happens that’s about the historical average over the last 200 years. So again, cases are still being made that there may be slower growth than we’ve been experiencing, but probably not a global recession.
National debt. We won’t spend a ton of time here, but that’s one concern. We’ve got $31 trillion worth of debt right now. We had a 35% increase in net debt level from 2020 through 2022. A lot of money got pumped into the economy and it could be a problem as far as debt levels. So it’s all relative to how much debt you’ve got based on your GDP. We’re seeing some improvement here, but when you look at all the deficit spending, generally over the last 100 years or so, we’ve either been break even or in a deficit. The accumulation of all the annual deficits is equal $31 trillion. Nothing to sneeze at. Long term, if that continued, it certainly could hamper economic growth, something we’re watching, but probably not something that we’re seeing on the doorstep as far as a big problem. It’s a complicated issue. Believe it or not, most of the world saw a decline in debt. 65% of countries including developed countries saw a decline in their debt levels. We did not. We took on more debt. In the world that also could mean that we’re a bit less competitive in the future. One reason why we want to stay globally diversified, not just have US investments, is we want to have things outside the US as well. Economic growth and inflation have helped reduce U.S. debt incrementally over the last year or so because tax receipts have been so good. A lot more money has gotten pumped into the government, so that’s helped.
People can get whipsawed by their emotions. Left to their own devices without professionals, people tend to get scared, so they end up selling or they don’t invest. The first rule of investing according to Warren Buffett is Don’t lose money. The second rule of investing is buy low and sell high. Don’t do the opposite, but the average person does the opposite. They end up trying to buy high, then sell low. So it’s kind of a contrarian indicator to what the experts say but I do believe unlike crypto, that AI is real and it could be as transformative as the Internet. Bill Gates was quoted that he believes AI is the biggest game changer that he has seen since the early 1980s.
Stocks lead the economy. We talked about that. Stocks tend to look ahead and we think they are indeed suggesting better economic times are coming To reiterate, these are just our opinions and not guarantees of anything that may or may not happen.
Right now, it’s certainly fun to be flying the plane when things are going well, but we’re always here for both circumstances. We want to celebrate these times and during years like 2022, they’re equally important to make sure that you’ve got good, experienced pilots flying the plane.
Have a great rest of your day, and take care.

The opinions voiced on the Wiser Financial Advisor show with host Josh Nelson are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.