Although Black Friday is not the shopping spree it used to be, bond and stock markets will close early today. The tradition started back in 1992 as exchanges realized that traders and professionals took the day off, which created very thin trading volumes. Retailers still look forward to the day, which turns their yearly profit from being in the red (negative) to black (positive). However, Black Friday did not originate from the retailer’s phrase “in the black.”
The short story: about 75 years ago, it was commonplace for employees to call out sick or take off the Friday after Thanksgiving, creating a 4-day weekend. Philadelphia police were met with a rampant number of shoppers, along with people traveling for the annual Army Navy football game. Massive traffic, edgy travelers and crowded malls turned into more accidents, violence and 911 calls. The Philadelphia cops termed the day Black Friday. Interesting tidbit of Philly history!
One of the great features of this job is our client base. They come from all walks of life and age groups. We are lucky enough to get to spend time with some really interesting folks. Since this year has been more volatile than most, I have been seeing and speaking with clients more often. Their fears and questions are to be expected in this type of environment. I thought it might be helpful to pass along some of the most common thoughts and provide answers to those questions today.
Who is at fault for the current inflationary mess? What would have happened if we had not printed money during Covid?
This is a great question. Clearly the Fed and Government overdid it on the stimulus side. Once we reopened, there was less need to send checks to everyone and even less need for the Fed to keep purchasing Treasuries and Mortgage-Backed Securities in the open market. There is no one person or entity or political party who is solely at fault for this inflationary bubble. Combined, they all made mistakes, but it is easy to play Monday morning quarterback and second guess their actions.
When businesses were told to shut down completely, it was necessary to do something. PPP loans, bringing interest rates to zero and adding liquidity to financial markets, helped keep us out of what could have been another Great Depression. Markets could have seized, consumers might not have been able to put food on the table, and debts could have been defaulted on in sizable portions. Who knows how bad it could have become, but it is quite clear the Fed and Government actions helped. Going too far in providing liquidity is a much better option than doing nothing. Just like the housing bust, lessons were learned during Covid and the money printing phases. We are paying for it now, but the other option could have been much worse.
What should I do with my asset allocation today? What are people in my age/income bracket doing now?
One’s asset allocation is the single most important decision for a financial plan. Determining how much risk to take, how much income is needed, and what type of exposure (stocks, bonds, cash, real estate, etc.) matters more than individual security selection in most cases. Now that interest rates are near multi-decade highs and offering competitive returns relative to stocks, a thorough review of your financial plan should be on the table. It made economic sense to be overweight stocks in the prior decade when bonds only yielded 1-2%. Today, the question is more complicated. While we cannot make a blanket recommendation without individual client details, we can offer our services to those looking for answers. Nick Filippo and the team here offer a free financial plan review (NFilippo@towerbridgeadvisors.com).
Why is an inverted yield curve so important for markets?
An inverted yield curve occurs when longer-term interest rates are below short-term interest rates. Normally, when one wants to borrow funds, they pay a higher interest rate for longer-term loans. This makes sense as a longer loan has a higher chance of default. An inversion indicates an imbalance in the economy. Banks borrow on the short end through deposits and checking accounts and lend longer through mortgage loans and business loans. When the yield curve inverts, bank spreads disappear along with profitability, and they start to restrict lending. Once you restrict the availability of capital, you start to choke economic growth.
When the yield curve is inverted, one should expect an economic slowdown over the coming year. The Fed clearly wants this to happen and will not stop raising short-term rates until GDP slows, jobs are lost and inflation is brought back to reasonable levels. This is well understood by investors today. The real question remains, how much weakness is needed to get inflation back to normal?
My other investment advisor purchased a lot of great stocks during Covid, but now my account is down 40%+. Can you get my value back to those old levels?
This happens at the end of every economic cycle. It was easy to make money when the Fed pumped trillions of dollars into the economy. Almost all stocks went up. Even the worst run companies were profitable. Anyone who bought stocks or crypto felt invincible. Now that the economic landscape is much tighter, many investments are down 50% – 90%.
The quick answer is no, we cannot immediately get accounts back to their 2021 values. What we can do is fix the game plan. Create a structured budget. Get asset allocations to appropriate levels. Reduce unnecessary risk. Stick to a process that has worked in good and bad times. Any market cycle can hurt individual investors who get caught up in the euphoria. There is no quick fix, but sticking to a rules-based approach works over the long haul.
What is your best Holiday cookie recipe?
My family has a long line of bakers dating back to the early 1900’s. When recipes were passed down to me, my children were ecstatic to get involved. Every year around this time, we bake about 25 different kinds of cookies. Investment advisors typically attempt to cull out the weakest stocks in client portfolios and replace them with new leaders. Every year, my kids and I kick out 2-3 cookies and replace with new, unique ones that more people enjoy.
A new fan favorite in our bag is the White Chocolate Cranberry Pistachio Pudding Cookies. Happy to pass along the recipe (or trade) with anyone who still bakes; firstname.lastname@example.org). Here is the collection so far and 2 of my 3 children:
Christina Applegate is 51 today. Happy shopping….Go Team USA!!!
James Vogt, 610-260-2214