Consumer spending is the backbone of the U.S. economy, constituting over two-thirds of our nearly $28 trillion GDP. When consumers spend money on everyday goods and services, and make large one-time purchases, it not only helps to spur economic growth but is also a reflection of economic trends. This is because many factors affect consumer purchases, things like:
Many factors play a role in consumer behavior which affects the economy and in turn influence the stock market, bond market, commodities market, real estate market, and others. What do investors need to know about the state of the consumer and how it might affect the economy and stock market in the coming year? Of the various components of GDP, (click here for a in depth breakdown of GDP) consumer spending has been the most stable and in fact growing, while over the past decade government spending is down. The strength of the consumer has helped the economy stay out of recession despite higher inflation rates, layoffs in the tech sector, and ongoing uncertainty. In turn, this has helped to propel the stock market to new all-time highs. While consumer spending has a direct impact on economic growth, how everyday consumers feel about the economy can vary dramatically over time. Perhaps the best example is the decade following the 2008 global financial crisis. Consumer sentiment was poor for many years due to a weak job market. The housing bust and a sharp decline in manufacturing activity led many to give up on finding work, resulting in a falling labor force participation rate. Even when the overall economy was recovering, consumers were pessimistic. The fact that housing prices collapsed, and it took the stock market almost 6 years to recover also led to lower consumer confidence. In many ways, the situation today is the opposite of the post-2008 period. Despite fears of economic weakness, the unemployment rate is still at a historically low 3.7%, 353,000 jobs were added in January, wages have risen over 4% during the past year, and there are still nine million job openings across the country. The fact that the stock market is near all-time highs has also helped to boost the "wealth effect" among consumers. While the housing market still faces many challenges with 30-year mortgage rates above 6%, transactions that do occur are closing at relatively high prices. What's the bottom line? Despite some headwinds, consumers are increasingly optimistic as inflation improves and the job market remains strong. While there are still challenges ahead, consumer spending continues to support the economy and the stock market. The bottom line is the consumer will determine our path forward. -Paul R. Rossi, CFA
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Back in 2020 I wrote an article titled, "How to Leave a $1 Million Legacy to Your Children or Grandchildren with Only $10,000." How about we improve upon this outcome by several million dollars? I can’t remember the last time I thanked our Congress, but after coming up with a novel idea to the new rules around the Secure Act 2.0, maybe we all should. There is now a tangential approach that can feed into our original strategy. First, let’s point out the original strategy is a powerful tool for parents and grandparents to help set up the next generation. This new idea is one that can be layered on top of the original game plan that can dramatically improve the outcome. Let’s quickly recap what the original article laid out: The approach calls for setting up a custodial Roth IRA Account for your child/grandchild. The idea is to contribute $10,000 into a custodial Roth account by the time they are 18 which, when properly invested, it could grow to just over a $1M over the course of their lifetime. And when the money is taken out during retirement, they pay zero taxes on the million-dollar gain. (Link to original article here). There is one caveat to this strategy, the child/grandchild must have what the IRS considers “earned income” to be able to contribute to any type of retirement account. And as such, the account cannot be opened and funded until they are of working age. Still a great plan but doesn't allow tax-free investing until they are of working age. Even with this caveat, it allows the possibility of turning $10,000 into $1,000,000. Now let’s improve upon it. This is where the new strategy comes in and complements the original. The Secure Act 2.0 that was recently passed by Congress is the vehicle to do the early lifting. It now allows up to $35,000 to be rolled over from a 529 (education investment account) into a Roth account. So, what this new law does, it now allows you to get funds invested much earlier, and therefore there is more time for the money to grow. Here are the simple steps:
*An additional benefit: Gifted money from family and friends can now be turned into retirement savings. Doing some ‘time value of money’ calculations with this earlier starting point now allows the portfolio to grow to over $4 million dollars. Using the Secure Act 2.0 now improves the original outcome from $1 million to $4 million dollars. -Paul R. Rossi, CFA *Keep in mind there are additional details that investors/parents/grandparents need to understand before implementing this or other strategies. If there is one relationship to understand, this is it.
Yes, there are other factors that impact the stock market, things like interest rates, growth rates, current valuations, investor sentiment, and political events, just to name a few...but the growth in corporate earnings is THE #1 driver of stock market returns over time. Period. -Paul R. Rossi, CFA Very few things in life move in a perfectly linear manor.
The stock market is no different. Think of it as a feature of the system and not a bug, it can't be completely squashed. This chart above shows the number of pullbacks in the S&P 500 price index going back to 1980. There have been 226 pullbacks, and in this case, a pullback is defined as a drop greater than or equal to 5% from a previous high. You'll notice, they are quite common. Investing in the stock market is inherently uncertain in the short-term. Large and small pullbacks can occur at any time...and do, quite regularly. The market experiences several pullbacks each year with very few exceptions. Understanding and accepting this truth will go a long way in helping you build wealth. So, what's my prediction for 2024? I'll step out on a limb, and say, "the market will be volatile." -Paul R. Rossi, CFA Little talked about, but this idea has major implications for retirees. Two portfolios (the two top dashed lines in the chart above) with the same returns, not surprisingly, will without end up at the exact same point despite the sequence of their returns being different. Meaning, it doesn’t matter in which order the returns happen as long as the returns are the same overall. However, the portfolios (the two solid lines) with fixed withdrawal rates end the 30-year period at vastly different points based on when market drawdowns occur. When taking distributions, timing matters. A sound financial plan and asset allocation when approaching and entering retirement can help to mitigate what’s called “Sequence of Returns Risk." -Paul R. Rossi, CFA Guest post by: Abby Holt of abby@craftability.org Like it or not, money has a big influence on our life's success. Our financial beliefs, emotions, and habits play a significant role in shaping our financial future. By understanding and addressing our money values and behaviors, we can make more informed financial decisions and cultivate a positive relationship with money. Unveil and Overcome Your Financial Fears We all have certain limiting beliefs about money that can potentially hinder our financial growth. It's time to confront these fears, question their validity, and replace them with empowering beliefs about your ability to achieve financial prosperity. By challenging these beliefs and embracing a positive mindset, you open yourself up to new opportunities and possibilities. Take control of your financial future and create the abundance you deserve. Give Yourself an Edge with an Online Degree These days, the competition in the business world is fierce – so if you’re thinking about changing careers or starting your own business, earning an online degree is a great place to start. For instance, one potential option is pursuing a degree in computer science, you'll gain vital skills in logic, architecture and systems, data structures, AI, and computer theory, which can make you an in-demand professional. Also, online degree programs make it easy to work full-time and keep up with your studies. Empower Yourself with Financial Knowledge Ignorance is not bliss when it comes to finances. Equip yourself with financial knowledge and skills to make smart money decisions. Take charge of your financial future by investing in your financial education. Remember, the more you learn, the more confident and empowered you'll become in managing your money. Don't wait, start your financial journey today! Craft Your Personal Financial Vision Your financial journey needs a destination. Setting clear and realistic financial goals gives you a sense of direction and purpose. Remember, every big goal starts with small, achievable steps. Take the time to plan your goals carefully and break them down into actionable tasks. Stay committed and motivated, and you'll be on your way to financial success. Cultivate a Circle of Positive Financial Influence The company you keep influences your financial habits. Surround yourself with positive role models and mentors who can guide you towards a healthier money mindset and inspire you to reach your financial goals. Remember, it's never too late to start making positive changes. With the right support and determination, you can achieve financial success. Embrace Gratitude Gratitude can shift your focus from what you lack to what you have. By appreciating your current assets, you can foster an abundance mindset and attract more wealth into your life. Remember, gratitude is not only about acknowledging the big things but also finding joy in the little moments. Embrace gratitude as a daily practice and watch how it transforms your well-being. Digitize Your Records for Easy Organization Digitizing your records can be a game changer when it comes to financial management. With a paperless system, you'll be able to access all of your important documents in one place, quickly and easily. This means no more rummaging through stacks of papers and folders. You can even use free online tools to convert to PDF and then edit as needed. Also, digitizing your records reduces the risk of losing important financial information due to fires, floods or other disasters. By having a streamlined digital system, managing your finances will become more efficient and stress-free. Master Emotional Intelligence for Financial Decisions Emotions can often cloud our judgment, leading to impulsive financial decisions. It's important to recognize and acknowledge your emotions, but also to take a step back and consider the long-term impact of your choices. By managing your emotions, you can make decisions that align with your goals and aspirations, setting yourself up for a more secure and prosperous future. Remember, a calm and rational approach is key to achieving financial success. Reassess Home Expenses Your home shouldn't be a financial burden. If housing expenses are straining your budget, it's time to evaluate whether downsizing might be an effective solution for you. Downsizing can not only help you save money on housing costs, but it can also free up funds for other important financial goals. Additionally, a smaller home can be easier to maintain and provide a simpler and more manageable lifestyle. Alternatively, consider renting an apartment so you can get yourself in a better financial position, if necessary. Look around online, assess different neighborhoods, and see if you can find something that suits your budget and lifestyle. Unleash Your Entrepreneurial Spirit for Greater Income Entrepreneurship can open up new avenues for income generation. If you're passionate about a business idea, it's time to take the leap and turn your dream into reality. Embrace the challenges that come your way and stay committed to your vision. With determination and perseverance, you can create a legacy that lasts a lifetime. Take Control of Your Financial Situation Forming a more prosperous financial mindset takes some time and effort. However, by addressing your financial fears, improving your education, gaining financial literacy, setting personal financial goals, surrounding yourself with positive influences, practicing gratitude, reassessing your expenses, and exploring entrepreneurial opportunities, you can pave the way for greater financial success. Remember – money is a tool that, when used wisely, can lead to a more fulfilling and prosperous life. Thank you Abby for the great guest post. -Paul R. Rossi, CFA I’ve heard it said that 50 is the new 40, and 40 is the new 30. As a business owner, if you’ve been busy keeping all the balls in the air, running and growing your business but haven’t gotten around to planning for the day you eventually stop working, retirement or otherwise, this strategy is for you. If you are a small business owner (with no employees outside of your spouse), make over $200,000+ a year, are 45+ years old and haven't started saving for retirement, I have a plan for you to retire with $3,000,000. And if you're married, you can double this amount to $6,000,000. How? Using the tax code and a specific Small Business Retirement plan to your advantage. This retirement plan has advantages over the more common SEP IRA or other types of retirement plans. Here’s are the assumptions and plan: 45-year-old business owner, income of over $200k+ and $0 in retirement account.
15 years of contributions over a 20-year period, assuming a modest return, you'll have nearly $3 million dollars ($6 million if you include your spouse). Over this same period of time, you will have written off over $1 million dollars in business expenses and personal deductions that saved approximately $300,000 in federal taxes alone. You might be surprised as to what's possible, with proper planning it might just feel that we can turn back time. -Paul R. Rossi, CFA Interestingly enough, we may not even be aware this is happening. The last time I purchased a new car, seemingly out of nowhere I began to see the same car I just purchased everywhere. Magically my new car was much more popular than I previously realized. This phenomenon is powerful and is working behind the scenes all the time. Major events in our childhood, recent circumstances, education, relationships, our mental and physical health have meaningful impacts in how we filter, and thus how we see the world around us. How many people do you know that think investing in the stock market isn't much more than gambling? Or people that think gold is the only true store of wealth. Or people that feel the complete opposite. What is risky to one person, is considered a good time for another. Understanding how you view the world and why is extremely powerful in gaining an understanding of why you make the decisions that you do. The charts below, show all the same data, however, they represent how people might feel dramatically different while experiencing the same events. People will feel differently while the market is going through its gyrations over time. Some see risk, others see opportunity. The first two charts (respectively) show both bull and bear markets since the late 1950's but the y-axis of the two charts is not in the same scale. This is how some people might feel. The impact of losses is more powerful in relationship to gains. The chart below is more representative of the market during both bull and bear markets (same scale), but doesn't give the full picture as to what the market has achieved since the late 1950's. The chart below is the price return of the stock market over the same period of time. Same chart as above, now in log scale. How do you view the market and why? -Paul R. Rossi, CFA Gas prices are near all-time highs. Home prices, along with mortgage rates are at 20+ year highs, which has caused housing costs to skyrocket. Core inflation is higher than it's been in over 30 years (albeit coming down). In spite of this, keep in mind what 99-year-old Charlie Munger said recently, "If I can be optimistic when I'm nearly dead, surely the rest of you can handle a little inflation." -Paul R. Rossi This is a map of what Christpoher Columbus and his contemporaries thought the world looked like in 1490.
From our 20/20 vantage point today, it seems our ancestors were pretty far off from reality. What did it take to update our understanding of the world? It took many years of adventurous and sometimes dangerous exploration, it took better technology, and the willingness to change our beliefs. Which brings me to the idea of: What do we think we "know" today that will be proven wrong tomorrow. I'll go out on a limb and say there will many ideas today that will be proven wrong, in virtually every discipline, from physics, biology, anthropology, and psychology...just to name a few. As a financial advisor I read quite bit of financial related material, and from time to time, I come across investment products that make some pretty bold claims, like incredible returns with no risk. And when I come across these types of claims, I follow what has become known as the Segan Standard, "Extraordinary Claims Require Extraordinary Evidence." Carl Sagan, the famous astronomer, coined this aphorism, which is sometimes shorted to ECREE. The next time you hear about an extraordinary claim, before blindly believing it, or taking action, you would be well-served to remember ECREE. As Mark Twain said, "It ain't what you don't know that gets you in trouble. It's what you know for sure that just ain't so." -Paul R. Rossi, CFA Did you ever watch those old cartoons where the dog or cat are running in circles going nowhere? If you did, then you might be able to relate to what the market has done over the last 2.5 years. The stock market is right back where it started back in April 2021. Some interesting facts over the last 2.5 years: If you would have bought at the high in 2021, you'd be down over 10% today. However, if you got lucky and bought in October 2022, you'd be up almost 20%. From its high in 2021 to the low in 2022, the market was down over 25% at one point. Is this anything new. Nope. Should we be worried about this. Nope. What did GDP (Gross Domestic Product) do over the same period of time? GDP went virtually straight-up from $23 trillion to over $27 trillion.
What's going on? Charlie Munger said at one point, "If you're not a little confused about what's going on, you don't understand it." This is what markets do, they provide very uneven returns. In the short-term, it can feel like we are going nowhere fast. -Paul R. Rossi, CFA Magic mirror on the wall, who is the fairest one of all? It might just be short-term U.S. Treasuries. Why? Let me count the ways.
Maybe the evil queen was on to something. -Paul R. Rossi, CFA If you are a new borrower or needing to refinance a loan, the cost of money hasn't been this high in over 20 years. And it doesn't matter who you are or what type of product, rates (and therefore costs) are substantially higher.
The game has changed. Banks and other financial institutions are charging substantially more, but... they are not paying much more.
When the game changes, players need to change. -Paul R. Rossi, CFA
The whistle-blow signaling the kickoff of the NFL season is echoing far beyond the stadiums. It's marking the onset of an unparalleled era in American gambling, highlighting a cultural transformation we've witnessed in recent times. Betting Everywhere and On Anything. Today, the majority of Americans are just a click away from placing a bet. It's as easy as unlocking your smartphone. The digital age has transformed our devices into mini-casinos. With the rise of apps dedicated to gambling, even the NFL isn't immune to the lure of this rapidly expanding industry. Remarkably, the state's sanction gambling, making a tidy profit as it proliferates. Cultural titans like the NFL have endorsed it, intertwining sports fandom with sports betting. ESPN's recent collaboration with a sportsbook is testament to this growing trend. With over 1,000 casinos spread across the nation and an affirmative nod from the Supreme Court in 2018, sports betting is soaring. The 2022 gaming revenue is an evident indicator, setting a staggering record of $60 billion. With the current NFL season underway, 2023 promises to break even this impressive benchmark. The New Landscape From Vice to Virtue The name "Las Vegas Raiders" would've raised eyebrows a few decades ago. But today, with the NHL's Golden Knights just a stone's throw away and growing speculation around NBA's next expansion in Las Vegas, it's clear: gambling's once-taboo status has been overturned. From clandestine dealings, it has transitioned into the limelight of legitimacy. A Flip Side to the Coin However, with this exponential growth comes cautionary tales that America should heed. The rapid escalation in gambling doesn't come without its set of challenges. Although determining the exact number of gamblers transitioning from casual to compulsive is tough, there are indications of an increasing trend in gambling related problems. America can also learn from nations like the UK, where gambling has been deeply rooted for a longer duration. Alarming statistics, including thousands of children identified as problem gamblers and a significant percentage of suicides linked to gambling woes, shed light on the possible repercussions of unchecked gambling growth. Plan Responsibly As the NFL season is underway, heralding what could be the largest gambling season in history, it's crucial for all stakeholders – governments, institutions, and individuals – to approach this burgeoning industry responsibly. While there's undeniable excitement and potential profit, the societal implications should not be sidestepped. Balancing this thrilling pastime with education and safeguards will ensure a sustainable and healthy relationship with the world of betting. -Paul R. Rossi, CFA Good Jocko Willink, former Navy SEAL lieutenant commander and author is known for saying "good" when bad news arrives. He has said, "One of my direct subordinates, pulls me aside with some major problems...one day he was telling me about some issue that he was having and he said I already know what you're gonna say," I said, "what am I gonna say," "you're gonna say, good, he said "that's what you always say when something is wrong and going bad, you always just look at me and say good." And I said "well, yeah when things are going bad there's gonna be some good that's gonna come from." "Didn't get the new high-speed gear we wanted, good. Didn't get promoted, good. More time to get better. Mission got cancelled, good. We can focus on another mission. Didn't get the job you wanted, good. Got injured, sprained your ankle, got tapped out, good. Got beat, good. Learn. Unexpected problems, good, we have the opportunity to figure out a solution. That's it. When things are going bad, Don't get all bummed out, Don't get startled, Don't get frustrated. If you can say the word “good,” guess what? It means you're still alive, it means you're still breathing, and if you're still breathing, well then hell, you still got some fight left in you. So, GET UP, DUST OFF, RE-LOAD, RE-CALIBRATE, RE-ENGAGE, GO OUT ON THE ATTACK. GET AFTER IT Watch the 2-minute Jocko video here. -Paul R. Rossi, CFA Banking at the most fundamental level is a “spread" business. Traditionally banks take in deposits at “x” and loan them out some multiple of x, say “1.5x,” and the difference between what they pay in deposits and what they charge on their loans is called “the spread.” The bigger the spread the more they make. As an argute individual, the goal is to minimize the spread you pay, either by lowering the rate you pay on loans, or by increasing the rate being paid to you in your bank/brokerage, or both. Right now, there is quite a discrepancy between various interest rates being charged and being paid among banks, brokerages, mortgage companies, etc. For savvy borrowers, investors, and business owners, this is an opportunity. Here's an example: Mortgage rates today are higher than they’ve been in over 20 years. Hovering around 7%+. Ouch. Borrowing a $1M to buy a home today will cost you $6,650 a month (in principal and interest) at 7% with a traditional mortgage. Currently, many of the large banks are paying near 0-1% on their checking/savings accounts. So, the spread to the typical person could be 6%. (7% - 1%). There is a better option today for borrowers, rates are less than 6%, and it's a loan that doesn't use your home as collateral. How about paying $4,900/month instead of $6,650 on a $1M mortgage, a 33% savings on your monthly payment with a much lower rate of 5.88%. In addition to the lower rate, the loan would be interest-only, there is no underwriting, no credit score required, and cash in hand in just a few days. Couple this 5.88% loan with a 5.45% US Treasury Bill, and you've gotten the spread down to far less than <1%. (5.88% - 5.45% = 0.43%). Your win is the banks loss. Does this work for business loans, or auto loans, or any other type of loans? Yes. Sound too good to be true? It’s not, so what's the hitch? You have to have a sizable investment portfolio. *Retirement accounts do not qualify. Do you know your spread? -Paul R. Rossi, CFA The 3-Month Treasury Bill rate is currently 5.48%, the highest among all US treasury maturities, it was near 0% at the beginning of last year. The 3-month rate is currently higher than the 3-year by 72 basis points. At the end of May, the 1-Month Treasury Bill eclipsed 6% for the first time ever and was the first treasury instrument to do so since 2002. This is a situation known as an inverted yield curve. An inverted yield curve is when shorter-term notes pay higher effective yields than longer-term bonds. The yield curve is considered “normal” when longer-term bonds yield more than shorter-term ones. An inverted yield curve historically signals that the broader economy might be headed for some tough times. Yield curve inversions are regarded by many as warning signs of a recession, as they have consistently preceded US recessions. They also indicate uncertainty in equity markets. How much should you worry about this yield curve inversion? Is a recession coming? And if so, how soon? Who tends to be the winners and losers of an inverted yield curve? What Inverted Yield Curves Mean for Recessions Generally, investors receive higher returns when they agree to commit their cash for longer time periods. The fact that an investor today can lock in a 5.48% effective annual yield with principal paid back in 3-months, but just 4.33% for one decade doesn’t sound quite right, does it? An inverted yield curve occurs when near-term risks increase. Investors demand greater compensation from shorter-term treasuries when long-term expectations for the economy sour. Inverted yield curves can be more clearly illustrated through yield spreads. Two of the most closely followed spreads are the 10 year / 2-Year Treasury Yield Spread and the 10 Year / 3-Month Treasury Yield Spread. The 10 / 2-year spread inverted at the beginning of July last year and has stayed negative since, stirring up fears of a recession. At the same time, the technical definition of a recession was met early last year when two consecutive quarters of negative GDP growth were logged between Q1 and Q2 2022. The 10 / 3-month spread is also a popular recession indicator and represents the relationship between long-term bonds and what’s often considered the risk-free interest rate. In late October, the 10-year/ 3-month spread turned negative for the first time since February 2020. There have been six major US recessions since 1976, per the National Bureau of Economic Research’s definition and ALL six recessions were preceded by an inverted 10 / 2-year spread lasting longer than two months. Each recession (other than the 2020 pandemic-induced one) occurred less than two years after the 10 / 2-year spread first inverted. An inverted yield curve doesn’t necessarily mean a recession will happen at the snap of a finger. Nor have yield spreads historically stayed negative for very long. In fact, recessions don’t typically occur while the yield curve is inverted. Instead, what often happens is that the yield curve starts to gradually “un-invert” shortly before a recession. This reversal is usually triggered by either rate cuts or the imminent possibility of them, leading to a decrease in short-term bond yields. Analysts believe the yield curve could remain inverted longer than usual due to the large yield gap and strong economy. The conclusion of the inversion will reveal whether it is caused by declining interest rates or new bets on the economy’s strength. Despite recent economic resilience, recessions have historically occurred within two years of a negative 10 / 2 spread. This, combined with achieving a technical recession by way of two consecutive quarters of negative GDP growth last year, explains the jump in near-term recession probability. How Consumers Can Be Affected by Inverted Yield Curves Consumers seeking short-term loans tend to be worse off amidst an inverted yield curve. Interest rates rise and costs of borrowing go up, leading consumers to either pay higher prices or defer purchases and investments altogether. This unfriendly environment tends to sour the consumer’s mood. Though yield curve inversions tend to precede recessions, decisions made by consumers can ultimately flip the switch and force the economy into contraction. For each of the six recessionary periods listed above, and also at the time of an inverted 10/ 2 year or 10 / 3-month spread, the University of Michigan’s US Consumer Sentiment Index was either declining, below its historical average, or both. The same goes for the US Consumer Price Index, which was either on the rise, above its historical average, or both in all six periods. The Consumer Sentiment Index hit an all-time low of 50 last June right as the 10 / 2-year spread turned negative, and inflation peaked at 9%. The index is currently around the same level as it was at the end of the Great Recession of 2007-2009. The 10 / 3-month spread moved in the opposite direction of consumer sentiment last year. As the Consumer Sentiment Index plummeted to historical lows, the 10 / 3-month spread widened. It seems the 10 / 3-month spread caught up to the reality of depressed consumer sentiment and the highest CPI in four decades. How Equities Can Be Affected by Inverted Yield Curves Companies in the business of short-term borrowing and long-term lending, such as banks, have historically underperformed when the yield curve inverts. Borrowing costs increase near-term, and profits get compressed when long-term loans are issued with less attractive rates. Stocks bearing high dividend yields are also thought to be less attractive when short-term rates spike. Yield-seeking investors may flee equities in favor of shorter-term treasuries since payments can be captured without inheriting company risk. On the flip side, companies that issue short-term loans would expect to see a bump in interest payments. The same goes for companies with large amounts of liquid assets on their balance sheets. How Fixed Income Can Be Affected by Inverted Yield Curves Inverted yield curves raise short-term US treasury yields closer to those of riskier bond types such as junk bonds, corporate bonds, and also real estate investment trusts (REITs). When the spreads between lower-risk US treasuries and these higher risk, non-Treasury backed securities contract, the US treasuries are typically seen as more attractive. When a flat or inverted yield curve lifts short-term treasury rates closer to or greater than long-term ones, this presents a situation in which investors could lock in a similar interest rate at a lower duration (lower interest rate sensitivity) to maturity. One thing to note: if short-term rates continue rising, then that bond value would likely decrease. However, assuming the investor is willing to accept implied short-term risk and believes the issuer, in this case, the US government won’t default, he or she might have an opportunity to achieve a greater effective yield. The Bottom Line The yield curve has been inverted since July 2022, but history has shown that any economic fallout following a yield curve inversion doesn’t happen immediately. Investors that take cues from the 10 / 2-year spread might look to the 10 / 3-month spread as well, as both have preceded all six recessions that have occurred dating back to 1980. -Paul R. Rossi, CFA As the digital age reshapes some traditional norms, a dramatic shift in the sources of financial advice is emerging among investors. Betterment, an online investment company, recently surveyed 1,200 investors from Gen Z to baby boomers about their preferred sources of financial information. The study revealed a startling trend: more than half of Gen Z and millennial investors are receiving financial advice from social media. Simultaneously, the survey found that financial advisors are the most trusted source of advice, with 67 percent of respondents ranking them in the top three. Meanwhile, social media influencers lagged, with only 22 percent ranking them within their top three. This intriguing data prompts a deeper exploration into the risks and rewards of sourcing financial advice from social media influencers versus licensed financial advisors. Social Media: New Face of Advice? Social media influencers, with their enormous online presence, have emerged as a significant source of financial advice for investors. Influencers often share personal anecdotes and strategies that have worked for them, or promote certain financial products, offering sometimes a very relatable and accessible source of financial advice. However, despite their appeal, there are noteworthy potential risks associated with relying solely on influencers for financial counsel:
Financial Advisors on the other hand are required to:
What are the benefits of using a Financial Advisor?
Just a couple, or even one significant bad financial decision can have major implications, potentially damaging your financial well-being. The onus remains on investors to discern between advice that is based on trying to promote clicks, selling financial products, hearing half-truths, or get rich quick schemes, vs. advice that is personalized, grounded in sound financial strategies that comes from a trained, and regulated fiduciary advisor. -Paul R. Rossi, CFA Note: While I freely admit that I might be biased as I run a financial advisory firm, it doesn't change my core belief that working with a professional advisor is typically more prudent than taking advice from a social media influencer. How can we beat inflation? Own assets. What type of assets? Assets that appreciate and/or produce income greater than inflation over time. While history is not a perfect predictor of the future, it does tell us what has happened in the past. And if the future is anything like the past, then history can be helpful. In this case, I believe history can be used as a guide. Over the past 10 years, the consumer price index (a proxy for inflation) has increased by just over 30%; which means that prices on a general basket of goods is 30% more expensive than they were 10 years ago. If you've bought anything recently you, know it's more expensive than it was 1 year ago, and quite a bit more expensive than it was 10 years ago. Knowing this, it's important to own assets that have, and will continue to grow faster than inflation. How do we overcome this general level of price increases?
Investors in gold, real estate, and the stock market have done well over the last 10 years and have kept investors significantly ahead of inflation. Will the future look exactly like the past, the short answer is no, but it won't surprise me if it looks somewhat similar. -Paul R. Rossi, CFA Valuation matters. What is valuation? It is determining what something is worth. In terms of the stock market, it’s determining what a company is worth. There are various valuation techniques that are available, some more precise than others. "Valuing a company," according to NYU Finance Professor Aswath Damodaran, also called the Dean of Valuation says, "is part science and part art." As valuation techniques require the idea of making forecasts about the future which is fraught with difficulty. They also require generating a compelling story around what the future might look like. Let’s review a couple of very successful companies where their valuation got ahead of their price. Back in 2000 Microsoft’s shares got as high a $58 a share (split adjusted), the company and stock had done quite well for many years leading up to early 2000. However, the future played out quite differently for shareholders who purchased in 2000. It took over 16 years for Microsoft’s stock price to get back to this previous high of $58 a share. During this 16-year period, the stock lost over 74% of its value at one point. What’s interesting, over this same time period, Microsoft’s revenue more than tripled, net income more than doubled, and earnings per share tripled as well. It’s important to consider if you bought the stock in 2000, and were 30 years old at the time, you would have needed to hold until you were 46 just get to back to even. All the while, during this same time the overall stock market gained 100%. This was a massive opportunity cost. Do you think you could have held Microsoft stock for 16 years only to get back to break-even while the overall market did quite well? Not many could. Microsoft tripled its revenue and earnings per share while the stock performed horribly. How can this happen? It comes down to valuation. It’s PE and PS ratios in early 2000 were 73 and 30 respectively, which by most historical valuation metrics is extremely high. Over the course of the next 16 years these ratios were pushed down to as low as 8 and 2. Before finally coming back to more historically long-term averages. It can get even worse. Cisco Systems reached a high of $80 per share in early 2000 and 23 years later is still 36% below its high from 2000. How has the underlying business done? Revenue over the last 23 years has almost tripled, and its earnings per share has grown over 500%. Back in 2000, Cisco’s PE and PS ratios were over 200 and 35 respectively. Investors who purchased 23 years ago have lost money as the company’s valuation has come down. This drives home two important points:
These are just two examples, however, there are countless others. -Paul R. Rossi, CFA
You'll read headlines about life hacks and shortcuts. If that’s what you're looking for, keep reading to learn anti-hack "secret." Becoming an expert, mastering a skill, and deep understanding takes time. I’m impressed with the people who put in the time and commitment to excellence, who are always striving to improve. Developing into a chess grandmaster, an Olympic athlete, or professionally playing a musical instrument takes countless hours of practice…in fact, it takes thousands of hours. Over the course of my martial arts training, I’ve executed more than 40 thousand front kicks along with countless other types of kicks. There are no short cuts, I put in the hours. Don’t get me wrong, there are smarter ways to train, but there is no short cut for putting in the time and concentrated effort. After almost 30 years of training, I am still working on improving. Ironically, the further down the path I go, the mirage of any actual destination has been replaced by the understanding that the journey is the destination. People who have a single-minded mission understand the idea of compounding. They understand consistently striving to make small improvements over time creates massive advances. Let’s take the simple idea of making a 1% improvement, and let’s say we do this every day for just 1 year. Initially, you might think over the course of a year would lead to an improvement of 365%, which would be a massive improvement from where you began, but you’d be wrong. Your improvement would actually be over 3,778% (1.01^365). This is the power of compounding small numbers consistently. How do we become an expert? It's a 1-step process:
Malcolm Gladwell popularized the idea of the 10,000-hour rule, taken from research done by Professor Anders Ericsson, which states that to become an expert in anything, it takes 10,000 hours of diligent practice. More recent literature has modified that a bit, to say there is typically a range somewhere around that number. Either way, no matter where you start, often the most difficult part is starting. So start. The sooner you start, the sooner those hours of diligent practice will compound. Robert Greene wrote a book called "Mastery," and through his extension research on the subject he found when a person becomes a true master in their chosen field, they are able to see and make connections between disciplines that others cannot, they begin to think and move at a higher level, almost like operating in a higher dimension. Success in nearly every endeavor takes time and lots of diligent practice. Most people will only see the “finished” product of your effort, completely missing what it took to get there. The so-called "overnight" success takes countless hours of repetition, study, and self-reflection. Ironically, the secret to mastery is wrapped in hard work, and that’s the secret. It’s hidden in plain sight if people really want to look. -Paul R. Rossi, CFA What is an investment beast? An investor who doesn’t get scared out of their long-term plan. An investor who knows what they want and will stop at nothing to achieve it. Beasts are relentless. How do you become a beast? Do things that scare you a bit. You want to expose yourself to scary, uncomfortable, and difficult things. Over time, exposure to these stressors builds confidence. Confidence builds resilience, and resilience builds beasts. Right now, the so-called big scary topic of the hour is the debt ceiling. History of the Debt Ceiling. The debt ceiling was first established over 100 years ago by Congress. Prior to this, Congress was required to approve each issuance of debt in separate legislation. Since the end of World War II, our legislators have increased the debt ceiling more than 100 times, and it has increased from $300 billion to just under $31.4 trillion (over 100x). Repeat, Congress has raised the debt ceiling over 100 times. Be a beast, don’t let scary headlines scare you out of your long-term plan. -Paul R. Rossi, CFA Economic chaos has been extremely hard on small businesses. With economic volatility, many businesses have had to take extreme measures in order to keep their doors open and continue to grow. We’ve put together some tips and tricks that will help you keep your small business growing despite the current uncertain climate. Try Out Several Digital Marketing Techniques The digital world is constantly changing, meaning it is important for small business owners to be flexible and experiment with different digital marketing strategies. Now more than ever before, it is important for businesses to be creative and reach out to potential customers through digital channels like social media platforms and email campaigns. Experimenting with different strategies can help you find the most effective way of connecting with your target customer base. Benefit from Financial Assistance Programs Many financial aid programs are available for small business owners who are struggling during this difficult time. These programs provide much-needed capital injections that can help businesses stay afloat while they navigate this uncertain economic period. Research which programs are available in your area so that you can take advantage of them if needed. Monitor Your Cash Flow When running a small business, managing cash flow is crucial to ensure its success, particularly during tough economic times. It is vital to keep track of expenses and create detailed budgets to understand where the money goes each month. Moreover, the timely collection of payments from customers will help maintain a steady cash flow and avoid any unnecessary disruptions. Reduce Spending During this challenging time, businesses should focus on reducing expenses to ensure their continued success. Carefully review all expenditures and consider cutting back on office supplies or switching providers in order to save money. Additionally, reducing employee hours, if feasible, or implementing remote working policies can help reduce overhead costs while keeping employees engaged. Reach out to your vendors and ask about ways to reduce fees paid to them. Utilize Accounting Software Investing in accounting software can help ensure accuracy and security when dealing with accounts payable and receivable tasks. It streamlines processes such as invoicing and payroll calculations — helping to avoid costly errors and giving you peace of mind. Accounting software solutions are excellent options for small businesses looking for an easy way to manage their finances without sacrificing time or accuracy. Maintain Employee Engagement and Motivation Small business owners must prioritize their employees’ engagement and motivation even during times of uncertainty, as happy workers are essential for a successful business. Clear communication about any changes made in light of recent events, as well as future plans, is imperative for creating a secure work environment for employees. Furthermore, offering incentives such as flexible working arrangements or reward bonuses can be effective in boosting employee morale and engagement. Improve Efficiency With a Project Management Platform Using a project management platform can increase team collaboration and productivity, as it provides a centralized location for sharing information, assigning tasks, and tracking progress. It helps businesses streamline their workflows, improve communication, and ensure transparency and accountability throughout the project lifecycle. Take a look at this software if you want features such as real-time updates, progress tracking, and analytics that can provide valuable insights to help businesses optimize their project management processes. During turbulent economic times, small start-ups can stay afloat with the right approach. By experimenting with digital marketing strategies, investing in project management software, and prioritizing e-commerce, businesses can better weather any storms that come their way. This guest article was written by Abby Holt of Craftability. -Paul R. Rossi, CFA Since 2000, we have experienced.
In spite all these challenges, here are the facts:
How is this possible? The American people by and large wake up every day and want to improve their lives and improve the lives of their family. While far from perfect, our social structure allows almost anyone to pursue these dreams. Our unique time and place in the world is an incredible driver for opportunity, innovation, and growth...both individually and collectively. Charlie Munger recently said, "Never under-estimate a person who overestimates themselves." I would argue, this idea can be more generalized to the overall United States and its people. We have achieved more than what any other country could have imagined 247 years ago when our fledgling country fought for its independence. As Warren Buffett famously said during the financial crisis, "Never Bet Against America." -Paul R. Rossi, CFA |