What’s Going on in the Markets October 31, 2023

With so many global crosscurrents--another Middle East war, an uneven economy, stubborn inflation, and high interest rates, it’s no surprise that many will be happy to forget about October 2023. While nothing weighs as heavily as the horrific tragedies of the war in the Middle East, the stock markets saw their third consecutive down month after a terrific run up from the October 2022 bottom. Let’s look at what's weighing on the markets and what might be ahead.

Stubborn Inflation

Over the past year, I’ve expected inflation to retreat from its historically high level. But I've also stated in past writings that inflation pressures would be more stubborn than many on Wall Street believed.

After easing to 3.0%, the Consumer Price Index (CPI) has increased for three consecutive months and is now at 3.7%. Furthermore, measures of underlying inflation have started to reaccelerate.

In the latest Personal Income and Outlays reports, inflation showed an unwillingness to continue its recent descent. On Friday, October 27, the Personal Consumption Expenditures (PCE) for September showed inflation up 0.3% monthly (3.7% annualized). The PCE is the Federal Reserve’s (AKA The Fed) preferred measure of inflation.

While both inflation numbers are much improved over the 5%+ rates we saw earlier this year and last, they are a far cry from the Federal Reserve’s 2% annual inflation target.

Sticky Price CPI, which measures prices that are slower to change, like medical care, education, and housing, has resumed its increase. The annualized 3-month rate of change has shot up from 3.4% in July to over 4.4% last month. This is one of its highest readings of the past three decades outside of the post-pandemic surge. This suggests The Fed may have trouble getting inflation back to its 2% target.

Inflation measures are important not only because they erode the buying power of our dollars but also because they affect consumer sentiment, and sentiment influences consumer spending. Unhappy or non-confident consumers spend less, and less consumer spending can lead to an economic recession (which does not help keep stock prices up.)

High Interest Rates

To control inflation, The Fed adjusts short-term interest rates to cool consumer and business spending. The thinking is that higher interest rates discourage borrowing, which leads to lower demand, and lower demand presumably tends to portend lower prices.

The Federal Reserve meets about every six weeks to decide whether it will raise, lower, or hold short-term interest rates, considering various economic reports and factors. The last time they met was in September when they held short-term interest rates at 5.0%-5.25%.

In a meeting that concludes on Wednesday, November 1, they are widely expected to continue holding rates at this level. Many will listen to Federal Reserve Chairman Jerome Powell’s comments to assess the prospect of future higher or lower short-term interest rates. I think they’re done hiking rates but won’t hint at any rate reductions, which Wall Street is looking for.

The good news is that higher interest rates mean that cash is no longer “trash.” You can earn a 4.5%-5.5%+ return on your money market savings, CDs, and bonds. The bad news is that higher interest rates mean lower bond prices and may lead to an unprecedented 3^rd consecutive year of bond price declines (interest rates and bond prices are inversely correlated). In addition, higher interest rates on cash and bonds mean less of an urgency to take risks in the stock market, especially if one can get 5%-6% risk-free (no doubt that this sentiment has contributed to the pullback in the stock market over the last few months.)

Faltering Housing

Housing is one of the largest sources of wealth for consumers and a vital industry for the economy's health.

New Home Sales increased in September as homebuilders offered price-cut incentives and mortgage rate buydowns to attract buyers. Pending Home Sales, which tracks unclosed transactions of existing homes, ticked up in September but remained at the third lowest reading in its history.

Like consumer and business sentiment, homebuilder confidence is a crucial indicator to follow. It takes the pulse of current attitudes and can be an excellent predictor of future housing activity. Despite its rebound in the first half of the year, the National Association of Home Builders (NAHB) Housing Market Index (Builder Confidence Survey) is again falling. Today's low confidence levels indicate a much weaker outlook and reflect the effects of rapidly rising interest rates.

Today’s mortgage rates are at a 23-year high and heading toward 8.0%. This is a staggering increase of almost five percentage points since its record low in early 2021 and the second-quickest rise in history. The only faster increase in mortgage rates occurred in the early 1980s – a move only marginally steeper than today’s. Predictably, this has a significant impact on housing affordability.

Current multi-decade-high mortgage rates would be much more digestible to homebuyers if home prices weren’t still in a bubble. Unfortunately for them, prices have hardly budged. Home prices have surged by nearly 60% over the past five years, putting a significant strain on affordability. This problem has been exacerbated by rising mortgage rates, causing the average mortgage payment to increase by 134% since early 2018. And this doesn’t even include the increases in property taxes, insurance, repairs, maintenance, dues, etc. As a result, this is perhaps the most unaffordable time in U.S. history to buy a home.

Cooling Sentiment

Consumer and Business Sentiments are crucial to watch as their recent rebounds seem to be running out of steam. As mentioned above, consumer sentiment is essential to encourage spending and keep the economy “humming.” Small business sentiment is important because it encourages hiring, capital investments, and expansion. There are several surveys and measures of consumer and business sentiment, including widely followed surveys by the Conference Board and the University of Michigan.

October’s preliminary consumer sentiment readings plunged by more than forecast and were well below their 70-year average. Both Current Conditions and Future Expectations were down significantly. Inflation Expectations for the year ahead rose by 0.6 percentage points while expected business conditions for the next year dropped by 19%.

The latest and final October consumer sentiment readings from the University of Michigan finished October at 0.8 points higher than its preliminary reading yet is 4.1 points below September’s final reading. A significant reason for the decline in Consumer Sentiment this month was a rebound in consumers’ inflation expectations for the year ahead, which jumped from 3.2% to 4.2%.

The National Federation of Independent Businesses (NFIB) Small Business Optimism Index has been below its 49-year average for the last 21 months. Among small business owners, significant concerns remain regarding inflation, labor availability, and future economic conditions. As small businesses often need capital to grow, they are the most affected by high interest rates, and it is no surprise they are worried about the future.

I’m concerned about business and consumer sentiment because the readings I’m seeing have rarely occurred outside of an oncoming recession. Business owners are struggling, and there are signs that strong consumers are starting to tighten their belts.

Another Middle East War

As the horrific events in the Middle East continue to develop and command the attention of the world, economic issues may seem relatively unimportant. However, the Israel-Hamas conflict creates geopolitical risks with potential global economic consequences, and it may be helpful to consider early projections and analysis of how these consequences might unfold.

Any impact comes when the global economy is fragile, already strained by the ongoing Ukraine-Russia war, and facing challenges such as weak growth, economic fragmentation, high interest rates, and stubborn inflation.

On the other hand, the U.S. economy appears relatively strong by many measures, and the United States is the world's largest oil producer and thus relatively insulated from small shifts in the global oil supply that usually occur during wartime.

While U.S. military support of Israel will add to expenditures that have already been increased by the Ukraine war, U.S. Treasury Secretary Janet Yellen has indicated that the United States can support both allies. Of course, that will lead to even more inflation, causing spending deficits.

Many U.S. technology companies have production or research and development facilities in Israel. However, work in those facilities is expected to continue except for employees called for reserve duty.

So far, the U.S. stock market reaction to the war has been relatively muted. Historically, wars outside U.S. borders tend not to create lasting trouble for the domestic stock market.

Clearly, it is still early, and the economic situation can change anytime. For now, while the Israel-Hamas conflict is a tragic humanitarian crisis, it is not a reason to change your personal financial or investing strategy.

Wobbling Stock Markets

October has been living up to its reputation for being a volatile month in the stock markets and closing down for the third consecutive month (-2.2%). The S&P 500 index is down over 9% from the peak in July 2023. However, we are entering a seasonally favorable time of year in the markets. November to December tend to be stronger months of the year, but as a pre-election year, it has even more favorable seasonality. Finally, when the market is so strong as it was through July, historically, it has also portended a nice finish to the year.

But given the headwinds just discussed, any year-end rally could fail to meet expectations or, worse, not materialize.

There is a continuing debate about whether the October 2022 lows ended the bear (down trending) market that started in January 2022. Some assert that a new bull (up-trending) market was born and that we are in the early innings of an upward trend, the start of a new bull market. Others assert that the bear market is intact, and all that we’ve witnessed since October 2022 was an extended bear market rally, which is now over. Only in the fullness of time can we know which camp is right.

The bears will point out that it is unprecedented to have a 10% correction in the first year of a bull market. It’s also unusual to see small capitalization stocks struggle so much in the early stages of a new bull market. In fact, the small caps are down for the year and are at risk of undercutting their October 2022 lows. Thus, the outsized correction and narrowness of the rally from the October 2022 bottom gives me food for thought and leaves me a bit skeptical that we’re in a new bull market.

Currently, on the surface, the S&P 500 is up about 9.2% year to date. But if you take away the seven strongest tech stocks in the index, AKA the Magnificent Seven (Apple, Amazon, Meta, Microsoft, Microsoft, Nvidia, Tesla), the index would be only up slightly on the year. In fact, if you look at the equal-weighted S&P 500 index (where each stock gets an equal “vote” rather than being weighted by size), it is down 4.1% year-to-date. Clearly, most stocks are not participating in the “new bull market."

By all accounts, so far, third quarter 2023 corporate earnings are strong and beating expectations, though revenue growth is somewhat tepid. Much of the earnings growth comes from higher profit margins, meaning that cost savings are the primary driver of higher earnings, not strong and improving consumer demand.

Until seasonality asserts itself and strength re-emerges in the stock market, I believe caution and defensiveness are warranted for short-term investors. For long-term investors, this may be a time to pick some favorite positions you plan to keep for 3-5 years or longer. While this is not a recommendation to buy or sell any securities, this is when taking advantage of a stock market sale works in the long term. For our client portfolios, we remain hedged and recently slightly reduced our exposure to stocks, considering the risks discussed above.

Recession or No Recession?

When it comes to economic recessions, it’s a matter of when not if. So, while pundits continue to debate whether we’ll have a soft landing (no recession) or a hard landing (recession), they both might be right—just at different times.

The last recession we had in 2020, post-COVID, was short-lived thanks to the extraordinary fiscal and monetary stimulus unleashed on the economy back then. This, in my opinion, has contributed to the inflation hangover we’re now experiencing. Pass the aspirin, please!

In my opinion, despite a still strong job market and robust consumer spending to date, the weight of evidence points to several areas of gradual deterioration in the economy that will lead to a recession by mid-2024. Admittedly, I thought we’d be in a recession with much lower housing prices by now. But I obviously underestimated the strength and durability of the consumer with wallets full of cash and credit cards looking to spend after an awful and extended COVID lockdown. And I clearly did not anticipate how fast mortgage interest rates would rise, taking existing homeowners with low-interest-rate mortgages out of the housing market and making the supply of homes as tight as it is.

Today, we have a federal reserve intent on taming inflation, so interest rates will be higher for longer, which is not stock-market friendly. While many might not dump their existing stocks in this new high-interest rate environment, they might not be as willing to take on more risk in a world where 5%-6% returns come “risk-free.” And while a stock market buyer's strike might not be as bad as all-out selling, it certainly doesn't help stock prices rise to the level of a new bull market.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: InvesTech Research

Should the Government Shut Up or Shut Down?

As September ends, the U.S. government seems headed for a shutdown, which would begin on October 1st. Although it is possible that a last-minute agreement could keep the lights on, that becomes less likely with each passing day. With all the nonsense that comes from Washington, would we rather have our government shut up rather than shut down?

Regardless, here's a look at the federal funding process, the current situation in Congress, and the potential consequences of a failure to fund government operations.

Twelve appropriations bills

The federal fiscal year begins on October 1, and under normal procedures, 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.

These appropriations are considered discretionary spending, meaning that Congress has flexibility in setting the amounts.  Although discretionary spending is an ongoing source of conflict, it accounted for only 27% of federal spending in fiscal year (FY) 2023, and almost half of that was for defense, which is typically less of a point of conflict. Mandatory spending (including Social Security and Medicare), which is required by law, accounted for about 63%, and interest on the federal debt accounted for 10%.(1)

Obviously, it would be helpful for federal agencies to know their operating budgets in advance of the fiscal year, but all 12 appropriations bills have not been passed before October 1 since FY 1997. In 11 of the last 13 years, lawmakers have not passed a single spending bill in time.(2) That is the situation as of September 27 this year (although, one bill, to fund military construction and the Department of Veterans Affairs, has been passed by the House but not the Senate.)(3)

Continuing resolutions and omnibus spending bills

To buy time for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date, generally at or based on the same level as the previous year. These bills are essentially placeholders that keep the government open until full-year spending legislation is enacted. Since 1998, it has taken an average of almost four months after the beginning of the fiscal year for that year's final spending bill to become law.(4)

Even with the extension provided by continuing resolutions, Congress seldom passes the 12 appropriations bills. Instead, they are often combined into massive omnibus spending bills that may include other provisions that do not affect funding.  For example, the SECURE 2.0 Act, which fundamentally changed the retirement savings rules, was included in the omnibus spending bill for FY 2023, passed in late December 2023, almost three months into the fiscal year.

Current Congressional situation

The U.S. Constitution gives the House of Representatives sole power to initiate revenue bills, so the House typically passes funding legislation and sends it to the Senate. There are often conflicts between the two bodies, especially when they are controlled by different parties, as they are now. These conflicts are typically settled through negotiations after a continuing resolution extends the budget process.

In a reversal of the typical process, the Senate acted first this year, releasing bipartisan legislation on September 26 that would maintain current funding through November 17 and provide additional funding for disaster relief and the war in Ukraine. Although this is likely to pass the Senate later in the week, it was unclear how the House would react to the legislation.(5)

Late on September 26, the House cleared four appropriation bills for debate (Agriculture, Defense, Homeland Security, and State Department). It is unknown whether these bills will pass the House, and if they do, it will likely be too late to negotiate the provisions with the Senate. A proposed continuing resolution that would extend government funding and include new provisions for border security had not been cleared for debate as of the afternoon of September 27.(6)

Effects of a shutdown

The effects of a government shutdown depend on its length, and fortunately, most are short. There have been 20 shutdowns since the current budget process began in the mid-1970s, with an average length of eight days. The longest by far was the most recent shutdown, which lasted 35 days in December 2018 and January 2019, and demonstrates some potential consequences of an extended closure.(7) However, in 2018-19, five of the 12 spending bills had already passed before the shutdown — including large agencies like Defense, Education, and Health & Human Services — which helped limit the damage. The current impasse, with no appropriations passed, could lead to an even more painful situation.(8)

Here are some things that will not be affected: The mail will be delivered. Social Security checks will be mailed. Interest on U.S. Treasury bonds will be paid.(9) However, some programs will stop immediately, including the Supplemental Nutrition Program for Women, Infants, and Children, which helps to provide food for about seven-million low-income mothers and children.(10)

Federal workers will not be paid. Workers considered "essential" will be required to work without pay, while others will be furloughed.  Lost wages will be reimbursed after funding is approved, but this does not help lower-paid employees who may be living paycheck to paycheck.(11) In an extended shutdown, the greatest hardship would fall on lower-paid essential workers, which would include many military families. Furloughed workers would struggle as well, but they might look for other jobs, and in many states would be able to apply for unemployment benefits.(12) Members of Congress, who are paid out of a permanent appropriation that does need renewal, would continue to be paid (shocked, aren’t you?).(1)3

Air travel could be affected. In 2019, absenteeism more than tripled among Transportation Security Administration (TSA) workers, resulting in long lines, delays, and gate closures at some airports. According to the TSA, many workers took time off for financial reasons.(14) Air traffic controllers, who are better paid, remained on the job without pay and without normal support staff. However, on January 25, 2019, an increase in absences by controllers temporarily shut down New York's La Guardia airport and led to substantial delays at airports in Newark, Philadelphia, and Atlanta. This may have been the impetus to reopen the government later that day.(15)

Unlike federal employees, workers for government contractors are not guaranteed to be paid, and contractors often work side-by-side with federal employees in government agencies. In 2019, it was estimated that 1.2 million contract employees faced lost or delayed revenue of more than $200 million per day.(16) A more widespread shutdown would put even more workers at risk.

While essential workers will maintain some federal services, furloughed workers would leave significant gaps. At this time, it's unknown exactly how each agency will respond to a shutdown. In 2019, some national parks used alternate funding to maintain limited access, which caused problems with trash and vandalism and was deemed illegal by the Government Accounting Office. This year, all parks might be closed during an extended shutdown.(17) Many other federal services may be delayed or suspended, ranging from food inspections to small business loans and economic reports.(18) Delays in economic statistics could make it more difficult for the Federal Reserve to judge appropriate monetary policy.(19)

Although a shutdown would cause temporary hardship for workers and the citizens they serve, the long-term effect on the economy would be relatively benign, because lost payments are generally made up after spending is authorized. A shutdown might decrease gross domestic product (GDP) for the fourth quarter of 2023, but if the shutdown ends by the end of the year, GDP for the first quarter of 2024 would theoretically be increased. Even if delayed spending is recovered, however, lost productivity by furloughed workers will not be regained. And an extended shutdown could harm consumer and investor sentiment.(20)

Surprisingly, previous shutdowns generally have not hurt the broad stock market, other than short-term reactions. But the current market situation is delicate to begin with, and it is impossible to predict future market direction.21

For now, it's wise to maintain a steady course in your own finances. Based on historical precedent, the shutdown is a non-event as far as your investment portfolio is concerned. But in the event of a shutdown, be sure to check the status of federal agencies and services that may affect you directly.

And the next time you see your favorite federal government politician, let them know you’d prefer them to shut up rather than shut down.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Sources:

1) Congressional Budget Office, May 2023
2, 4, 8) Pew Research Center, September 13, 2023
3) Committee for a Responsible Federal Budget, September 27, 2023
5, 6, 9, 18, 19) The Wall Street Journal, September 26, 2023
7, 11) CNN, September 21, 2023
10) MarketWatch, September 26, 2023
12) afge.org, September 25, 2023 (American Federation of Government Employees)
13) CBS News, September 25, 2023
14) Associated Press, January 21, 2019
15) The Washington Post, January 25, 2019
16) Bloomberg, January 17, 2019
17) Bloomberg Government, September 12, 2023
20) Congressional Research Service, September 22, 2023
21) USA Today, September 26, 2023

Protecting Yourself from the Latest Cyber Scams

Technology is ever-changing, and so are cybercriminals’ strategies.

What can you do to help prevent yourself from falling victim to new and trending scams? Read on to stay up-to-date on the latest cyber threats and ways to avoid them. 

1. Vishing and Voice Clone scams

Vishing, known as “voice phishing,” is a tactic where scammers leverage automated, computer-generated voice messages to call people and build trust in an attempt to obtain personal information. 

Vishing attacks are becoming more sophisticated as emerging artificial intelligence (AI) tools allow scammers to create audio content that can clone the voices of friends and family members.
 
If an alleged friend or family member calls frantically asking for money, hang up and call the person directly. You could also create a “safe word” that only you and your close family know. Should you ever receive a desperate call, you can quickly verify the validity with the safe word.

2. Phone scams: Smishing, SIM Swapping and OTP Bots, Contest or Crypto scams

We rely on our smartphones for almost everything. Unfortunately, there are more than a few ways scammers can reach unsuspecting victims through their smartphones. 
 
Cybercriminals are always looking for new ways to go “phishing” for your personal information. When tried and true methods grow tired and easy to spot, they’ll often shift their approach. Their latest tactics? Text message and social media scams.
 
Smishing: Smishing, or SMS phishing, is when a scammer sends a text pretending to be from a legitimate company (i.e. USPS, FedEX, etc.) in order to get sensitive information like your credit card or social security number. The text also often has a link asking you to confirm information. If there are typos in the message or if you’re suspicious, never click on the link. 
 
Fast Fact: Smishing is on the rise, costing victims a significant amount of money. In 2021, consumers lost an estimated $131 million because of SMS phishing attacks.
 
You may be aware of the security risks involved with phishing scams and clicking unknown URLs in emails, but the dangers are less well known when it comes to texts. Don’t be inclined to trust a text message any more than you do an email. Unfortunately, it’s just the latest trick.
 
You also need to watch out for job hoaxes, deposit scams and tax fraud.

SIM swapping: Another way hackers can use your phone is by “SIM swapping”. It's actually similar to the process of getting a new phone and SIM card from your provider. From there, the scammer can get access to multiple accounts by inputting a verification code or starting an account password reset.
 
Reach out to your mobile phone provider and ask about additional security measures to protect yourself from SIM swapping. 

One Time Password (OTP) bots: Another tactic scammers use is OTP bots, which trick people into sharing authentication codes received by text or email. You might receive a robocall or text from someone posing as a legit company like your bank. 
 
Remember, no legitimate company will contact you to ask for your username, password or full card number over the phone.

3. Student Loan Payment scams

Scammers can take advantage of those who owe student loans by posing as federal loan servicers or seemingly legitimate businesses. They call and email to offer solutions such as loan consolidation or lower monthly payments. 

As part of the application form to qualify for these services, they might ask for sensitive information like your Social Security number or banking information.
 
If you receive an unexpected phone call or email from someone who says they're with your loan servicer, hang up and contact your servicer instead. 
 
With federal student loan payments resuming in October, student loan payment scams are on the rise. Therefore, I will have a more detailed write-up on student loan payment scams coming in September.

4. Social Media scams

Popular movies and streaming services often depict shocking social media schemes where cybercriminals scam millions from unsuspecting victims. These scams may seem obvious when viewing them on screen — giving you a feeling of immunity against these attacks. But, social media scams can be subtle and difficult to detect, despite becoming increasingly common.
 
Be extremely wary when people you're connected to on social networks ask for money through instant message (IM) or email. Fraudsters have been known to hack social networks and assume the identity of real users, then send messages to their contacts stating the person has been robbed or is stranded somewhere and needs you to wire money in order to get home.
 
If you receive one of these requests, contact the person by phone and verify the request is real.

5. Investment, Contest or Crypto scams

Illegitimate contests, prizes and early investment opportunities are often at the center of crypto scams. They often target people who have already fallen for a crypto scam, so don’t let yourself be a repeat victim. They may offer you a refund if you pay an upfront fee or for access to your crypto wallet. 
 
If you hear about an investment opportunity that sounds too good to be true, it’s wise to think twice.

6. Digital Payment App scams

Third-party payment apps are convenient but beware of scammers when using them. While you can usually contest an illegitimate payment with your bank, it’s much more difficult to get a refund from a payment app.
 
Some common scenarios include accidentally overpaying, fake fraud alerts as well as phishing emails or texts. If you get a message that looks like it’s from a payment app, verify it by logging into your account through the app or website.
 
While it may be convenient, you should think twice before using payment apps while you’re connected to public Wi-Fi. These networks often have low security and may leave your personal information vulnerable to hackers and scammers. When you’re on the go, turn off both automatic Wi-Fi and Bluetooth connectivity on your phone to avoid automatically connecting to public Wi-Fi. 

7. Online Marketplace scams

Watch out for similar scams when selling or buying items through sites like Craigslist, Facebook Marketplace or eBay.
 
When you’re the seller, you might receive a fake payment receipt. Scammers may also overpay for an item you’re selling and then ask for a refund on that amount. When you send it, you may realize you never received their initial payment. Never ship the item until you have confirmation from your bank that payment has been received.
 
As a buyer, beware of bootlegs or broken items. If a deal seems too good to be true, it usually is. 

8. Work-from-Home scams

These typically start as an ad saying you can make big money working from home. Or maybe after posting your resume on a job search website, you’re contacted by an employer, who wants your driver’s license and bank account numbers before they even interview you.

What happens next? When you inquire about the job, the potential employer might ask for your sensitive personal information and subsequently swipe your identity and/or money.

9. Romance scams

In a romance scam, an unsuspecting person is tricked into believing they’re in a relationship with someone they met online — but in reality, it’s a con artist who often claims, conveniently, they can’t meet up IRL (in real life).
 
They’ll ask you to wire money for things like plane tickets, surgery or gambling debts. Their hope is that they can rely on the personal relationship they’ve built with you, though fraudulent, to guilt you into helping them in their time of need. 
 
If you’ve never met someone in real life, you should always view requests for payment and loans as potential red flags.

10. Suspicious "spoofing" Websites

Criminals create fake websites that look like real company websites in order to steal your personal information. Be cautious of links sent to you in emails. Phishing emails and smishing texts include links to these fake sites.
 
The best way to know that you are going to the real website is to type the URL directly in your browser or use favorites/bookmarks to access the website.
 
As a rule of thumb, look at the website address to be sure it starts with "https:" before entering personal information on a site. A green security status bar and padlock icon next to the web address are additional visual indicators that confirm you are on a secure site.
 
For additional protection, activate the additional web protection features of your anti-malware software such as Norton Cybersecurity.

Stay Active, Stay Safe

In addition to these scams, would-be cybercriminals also have more traditional tricks up their sleeves. Help keep yourself protected by remaining vigilant and remembering that if something sounds too good to be true, it usually is. By playing an active role in your safety and cybersecurity, you can stay ahead of even the craftiest of cybercriminals.
 
Also, don’t hesitate to report a suspected scam: 

• If you suspect fraud, you can file a complaint with the Federal Trade Commission at reportfraud.ftc.gov.
• To report suspected identity fraud, report it to identitytheft.gov and the social security administration at 800-269-0271.
• For Online crime or cyber scams, you can report it to the Internet Crime Complaint Center (IC3) at ic3.gov or the Cybersecurity and Infrastructure Security Agency at cisa.gov/uscert/report. 
• For Phishing scams, report it to the National Cybersecurity Communications and Integration Center (NCCIC) at us-cert.gov/report. 
• For suspicious text messages, copy the message and forward it to 7726, a centralized spam reporting service among all wireless carriers. 

If you suspect fraud or your credentials are stolen or compromised, change your password(s) immediately. Changing your password regularly to a long and complicated password keeps you one step ahead of the cyber scammers.
 
Most of us become victims of cyber scams because of complacency or laziness. We don’t want to bother with a long or complicated password, we skip the privacy settings on social media sites, we fail to activate two-factor authentication, or we don’t double check our monthly statements and transactions.
 
Unfortunately, getting in the habit of doing all these things on a regular basis is the only way to protect ourselves from potentially expensive losses of money, time and sanity.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Sources: FTC.gov, Ally Bank, consumerfinance.gov

Is a Recession Looming?

With inflation falling, the housing market stabilizing, and consumer spending showing surprising resiliency in the face of rising interest rates, both Wall Street and Main Street are passionately embracing the outlook for an economic soft landing.

Despite enthusiastic buying in the stock market of late, some major recession warning flags have not disappeared, consumer financial stress is increasing, and the Federal Reserve has just increased short-term interest rates by another 0.25% to 5.25%, and signaled that they may not be done raising interest rates.

The question on everyone's mind: is a recession looming? 

To answer that question, with help and data from InvesTech Research, let’s look at both sides: the economic “soft-landing” camp and the “hard-landing” camp, and see if we can’t draw any conclusions using a weight-of-evidence approach.

Evidence Supporting a Soft Landing

Inflation is Coming Down: The Consumer Price Index (CPI) is leading the optimistic charge in the media, with reports of decreasing inflation over the last twelve months. Headline CPI fell from 4.0% to 3.0% in June on a year-over-year basis. While much of this decline was driven by cyclical factors like energy costs, it still increases the odds of a soft landing.

Contributing to the decrease in overall prices are both the manufacturing and services sectors. The services sector saw inflationary pressures subside starting in early 2022. The Institute for Supply Management Services Prices Paid Index has declined by 30.4 points from its all-time high in December 2021. It has been down for the last seven out of eight months and remains in expansion territory (for now). This, too, supports a possible soft landing.

With decreasing inflation comes decreasing inflation psychology. Recently, consumers have reduced their expectations of inflation over the next year significantly. This measure fell in June to 3.3%, its largest decline since 2008, while the longer-term 5-year expectations remain more firmly anchored at 3.0%.

Actual inflation partially depends on what consumers expect it to be. If consumers expect inflation to be lower next year, businesses will plan to price their goods or services accordingly. It’s likely that the expected inflation rate will continue its downtrend and make a soft landing more likely.

Parts of the economy remain surprisingly resilient: In addition to easing inflation pressures, persistent strength in parts of the economy also supports a potential soft landing. Specifically, the service sector appears to remain resilient.

Services: The Institute for Supply Management Services Index (Non-Manufacturing) remains solidly in expansion territory with a reading of 53.9 last month (any reading above 50 is considered expansionary) and only one month of contraction in the last decade (outside of the pandemic). With services accounting for over 75% of U.S. gross domestic product (GDP), the current Index levels show continued growth. While there is no guarantee this will be maintained, its recent strength provides recession-free hope.

Labor: The relentlessly tight labor market has remained a stronghold of the economy for the last few years. June’s Non-Farm Payrolls report showed 209,000 new jobs created, another banner month for this indicator. The monthly average of new jobs added since January 2022 is almost twice as high as it was during the same period in 2018-2019 prior to the pandemic. In addition, the unemployment rate is currently at 3.6%, just fractionally above its 50-year low. With job growth holding up so well, it doesn’t point to a recession, despite being a heavily revised figure.

Housing: The last bit of soft-landing evidence is one of its strongest – New Home Sales. Sales of new construction have rebounded sharply. New homes currently account for a near-record 29% of all homes for sale, while the historical average is less than half that at just 13%. This recent rebound is driven by a resurgence in enthusiastic buyer psychology, reflected in a rise in traffic of prospective buyers and a reluctance by existing homeowners to sell their homes because of: 1) their current ultra-low mortgage interest rates, 2) higher home replacement costs and 3) potential capital gains taxes on highly appreciated primary residences. Whether this increase is sustainable will be clearer in the coming months.

Evidence Supporting a Hard Landing

A recession may nonetheless be in the cards: While I’ve laid out the evidence in support of a soft landing, many significant indicators just don’t add up, and therefore a recession may still be in the cards.

Leading Economic Index (LEI): The most glaring evidence against a soft landing is the Conference Board’s LEI, which has fallen for 15 consecutive months. Declines of this magnitude have always corresponded to a hard landing, and when the LEI falls below its 18-month moving average, a recession almost invariably follows. Additionally, the LEI’s 6-month rate of change (ROC) is deeply negative, further solidifying this warning flag (red flags are when the 6-month ROC breaks through the zero level prior to a recession). The LEI is historically a reliable indicator, and it is not sending an optimistic signal.

Yield Spreads: Another indicator that is screaming hard landing is the Federal Reserve’s Yield Spread model, which measures the risk of recession in the next 12 months. It’s based on the difference between long-term and short-term Treasury bond yields and recently hit a 42-year high of 71% before retreating slightly to 67% in June. This highly dependable indicator has never reached this level without a resulting recession, although lead times can vary significantly.

Consumer Spending: Lastly, consumer spending has supported the economy for much of the last few years, bolstered by trillions of dollars in stimulus payments and other benefits. Excess savings and lockdowns have helped fuel this strength, though it may be starting to slow.

Within retail sales, "Same-Store Sales" measures growth in revenue from existing (not new) store locations.  Johnson Redbook’s latest Same-Store Sales year-over-year figure went negative, indicating fewer purchases compared to a year ago. If this continues to deteriorate, it implies consumers are spending less overall than before, and a recession becomes more probable.

The Federal Reserve’s (a.k.a. The Fed) job is far from over: A potential soft landing combined with some weak economic indicators is a conundrum that puts the Fed in a tight spot. In addition, while headed in the right direction, inflation is still well above the Fed's 2% target.

Sticky inflation, which tracks items that change in price very slowly, has not come down as rapidly as overall measures. Sticky Price CPI from the Atlanta Fed has started to decline on a 12-month ROC basis but is still quite elevated, with the current reading at 5.8%.

The shorter, 3-month annualized ROC is much lower but still not close enough to the Fed’s target. It’s very likely that Sticky CPI will continue to decline, but the elusive 2.0% will take much longer to reach than the Fed would like.

Core PCE: Yet another, perhaps more important, inflation indicator is the Core Personal Consumption Expenditures (PCE) Price Index, which measures PCE excluding food and energy. This is the Fed’s preferred measure of inflation and remains at more than twice of the 2.0% inflation target. On Friday, the latest PCE measure came in at 4.1% YoY for June, declining from 4.6% in May.

Making the situation even worse, Core PCE has been flat for the past year and is falling very slowly. Even if it does start to trend lower, it will take quite a long time to reach the target level, putting pressure on the Fed to keep interest rates higher for longer.

Wage Growth: When it comes to inflation, one of the stickiest components is wage growth. The labor market remains tight, there are still more job openings than available employees, and wages continue to rise. The Atlanta Fed’s Wage Growth Tracker is off its all-time high, but at 5.6%, it is still far above its historical average. While increasing wages are beneficial for consumers, it’s a problem for the Fed as failure to control wage growth could risk another inflation surge.

Consumer Distress as a Potential Systemic Risk: Consumers amassed over $2 trillion in excess savings after the pandemic, primarily due to government support and lockdowns. This backlog of cash has helped smooth over many underlying problems in the economy.  After lockdowns ended, consumers spent as if they had unlimited funds. Tack on a decades-high level of inflation, and they’ve now burned through over 80% of their excess savings. Based on current trends, these savings will be completely exhausted by the end of this year. Once savings are depleted, some consumers will likely resort to what is now very expensive revolving debt.

And some already have. Despite the amassed excess savings in some households, consumers still took on more debt than ever after the pandemic. As a result, the combination of auto loans, credit card debt, student loans, and other debt is now at a record high – 72% higher than during the Great Financial Crisis.

Regarding student loan debt, the Consumer Financial Protection Bureau reported that half of borrowers whose payments are scheduled to restart soon have other debts that are at least 10% more expensive now than before the pandemic. If these trends persist, consumers may struggle to bring their savings back to pre-pandemic levels.

Those who have opened new credit cards in recent years or regularly carry credit card debt are quickly coming under more severe financial stress. Monetary tightening has driven average credit card interest rates to over 22% in May – the highest rate since the Federal Reserve began tracking the data in late 1994. Extremely high credit card interest rates combined with record consumer debt outstanding could prove to be an ominous combination.

Consumer spending is the ultimate driver of the economy, making up almost 70% of GDP. If consumers can no longer afford to spend, this systemic risk can become a reality.

The Weight of Evidence

While the evidence is compelling in both the economic soft-landing and the hard-landing camps, more upcoming near-term economic data will help tip the scale solidly into one of the camps.

While it’s easy to say that a recession is inevitable, one could make that statement anytime during our lifetimes. Indeed, it’s not a matter of whether we’ll have a recession because we will. It’s all about the “when” of the recession.

In my opinion, the weight of current evidence supports a recession starting within six months. To be honest, I personally thought we were already in a recession, but the economic data has not supported that opinion, which means I have been wrong so far.

Regardless, a continued deterioration in consumer spending, increasing debt levels, growing layoffs, and higher short-term interest rates will have a detrimental impact on consumer confidence, which constitutes a negative feedback loop that will lead to even further reduced consumer spending and increasing layoffs.

The next few months will be very revealing…. if not exciting!

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

Source: Investech Research

Is the Bull Market Really Ready to Charge?

On June 8, 2023, the S&P 500 index closed at 4,293.93, just over 20% higher than its lowest recent closing value of 3,577.03 reached on October 12, 2022.(1) According to a common definition of market cycles, this indicated that the benchmark index was officially in a bull market (uptrend) after a bear market (downtrend) that began in January 2022. By this definition, the current bull market began on October 13, 2022, the day after the bear market ended at its lowest point.

In more general terms, a bull market is an extended period of rising stock values. Bull markets tend to last longer than bear markets, and bull gains tend to be greater than bear losses. Since the end of World War II, the average bull market has lasted more than five years with a cumulative gain of 177%. By contrast, the average bear market has lasted about a year with a cumulative loss of 33%.(2)

Although a bull market is typically a time for celebration by investors, the current bull is being met cautiously, and it is unclear whether it will keep charging or shift into retreat. While it is impossible to predict market direction,  here are some factors to consider.

It's important to understand that while a 20% rally off last October’s bottom technically qualifies as a new bull market by Wall Street standards, it does not signal clear sailing ahead.

Over the past 100 years, a dozen bear market rallies of 20% or more occurred in protracted long-term bear markets. Not so surprisingly, five of these occurred in the 1929-32 slide into the Great Depression. A not-so-humorous anecdote from that era was that seven months after the October 1929 Crash, the stock market had recovered over half of its loss, and exuberant confidence had returned to both Wall Street and Main Street.

"While the crash only took place six months ago, I am convinced we have now passed the worst, and with continued unity of effort we shall rapidly recover." President Hoover – May 1, 1930

Yet the majority of the 1929-32 bear market still lay ahead.

Likewise, more recently, the 2000-02 bear market was interrupted by two very alluring back-to-back bear market rallies. One was +49%, that technically, by Wall Street standards– would have qualified for new bull market status.

It's important to consider how long every major stock market bottom has taken to achieve the 20% status to qualify as a “new” bull market. Since 1932, the median length of time to reach a 20% "liftoff" has been 64 days.

Today’s bull market required a lengthy 164 trading days to reach a +20% gain. Instead of a V-shaped bottom from extreme oversold and undervalued levels, this has turned into a grueling struggle. Ironically, the longest period in the past 100 years was in the 1947 bull market (281 days), which peaked with only a +24.4% gain just one month after reaching the 20% level. Real bull markets charge forward and are not timid.

Still lagging behind the high

One reason the new bull might not seem convincing is that (as of late June) the S&P 500 remains well below the record bull market peak in early January 2022. (3) Investors who hold positions in the broader market are still looking at paper losses and could face real losses if they choose to sell, a situation that may not generate the kind of widespread confidence that often drives extended rallies.

The current bull market is already eight months old, and it's unknown how much longer it might take to recover the total bear loss of about 25%, but recent history offers contrasting possibilities (remember, a 25% loss requires a 33% gain just to get back to even).

The last bull market regained the pandemic bear loss of 34% in five months and went on to a cumulative gain of 114%. The long bull market that followed the Great Recession of 2007-2009 took more than four years to recover an even steeper loss of 57%. But that bull kept charging and went on to a cumulative gain of 400%. (4–5)

A more pressing question is whether the recent surge could be a temporary bear market rally that quickly slips back into bear territory. This happened during the bear markets of 2000–2002 and 2007–2009. However, in 12 other "bear exits" since World War II, a gain of 20% from the most recent low was the beginning of a solid bull market. (6)

A narrow rally

Another key concern is that the current rally has been driven by large technology companies, which have posted big gains, due in part to excitement over the future of artificial intelligence. (7) The S&P 500  is a market-cap-weighted index, which means that companies with larger market capitalization (number of shares multiplied by share price) have an outsized effect on index performance.  As of May 31, the ten biggest companies, including eight technology companies, accounted for more than 30% of the index value. (8) Fewer than one out of four S&P 500 stocks have beaten the index in 2023, and nearly half have dropped in value. While it is not unusual for a relatively small number of companies to drive a rally, the current situation is more imbalanced than usual, and it remains to be seen whether exuberance for Big Tech will spread to the broader market. (9–10)

The market and the economy

While the stock market sometimes seems to have a mind of its own, it is anchored over the longer term to the U.S. economy, and the current economy continues to send mixed signals. The long-predicted recession has failed to materialize, and consumer spending and the job market remain strong. (11) On the other hand, inflation, while improving, is still too high for a healthy economy. Although the Fed paused its aggressive rate hikes in June — one reason for the market rally — a majority of Fed officials projected two more increases by the end of the year, and Fed Chair Jerome Powell confirmed the prospect of higher rates in Congressional testimony on June 21. (12)

Higher interest rates are intended to slow the economy and inflation by making it more expensive for consumers and businesses to borrow, which should slow consumer spending and business growth — and could send the economy into a recession. Although it may seem counterintuitive, bull markets usually begin during a recession, or to look at it another way, the market usually hits bottom while the economy is down and recovers along with the broader economy. Along the same lines, a bull market typically begins when the Fed is lowering interest rates to stimulate the economy, not when it's raising them to slow it down. (13) The current bull will have to buck both of these trends to sustain momentum.  And if a recession does develop, it could turn the bull into a bear.

Corporate earnings

Although investor enthusiasm can carry the market a long way, corporate earnings are the most fundamental factor in market performance, and the earnings picture is also mixed. Earnings declined by 2%  in Q1 2023 — less of a loss than analysts expected but the second consecutive quarter of earnings declines. The slide is expected to continue with a 6.4% projected decrease in Q2, which would be the largest decline since the pandemic rocked the market in Q2 2020.  The good news is that earnings growth is expected to return in the second half of the year, with robust growth of 8.2% in Q4. However, as with the current market rally, the surge is projected to be driven by large technology companies. (14)

Clearly, this bull market faces serious headwinds, and it may be some time before its true character emerges. While market cycles are important, it's generally not wise to overreact to short-term shifts, and it's better to focus on a long-term investment strategy appropriate for your personal goals, time frame, and risk tolerance.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Disclaimer: The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary. Forecasts are based on current conditions, are subject to change, and may not come to pass.

1, 3–4, 8) S&P Dow Jones Indices, 2023

2, 5) Yardeni Research, October 28, 2022

6) MarketWatch, June 8, 2023

7, 9) CNN, June 9, 2023

10)  Associated Press, June 8, 2023

11) Fitch Ratings, June 8, 2023

12) CNBC, June 21, 2021

13)  Bloomberg, June 5, 2023

14) FactSet, June 9, 2023