Investing Volatility
A recent client survey by Charles Schwab produced some viable insights during difficult times like this. Over the longer term 33% of investors attributed their greatest investing success to patience through volatility. It is hard to patient during the ups and downs, but the reality is when holding good quality investments, it has proven to always be the right thing to do. Unfortunately, patient doesn’t mean 2-3 months and sometimes it may mean 2-3 years. The funny thing is that even though that patience has always paid off, our emotions lead us to want to sell at the worst times and many people end up doing so costing themselves drastically in the long term. The second most cited reason for clients’ greatest investing success was careful research which came from 16% of respondents. We always tell people that before we step in and by a company, it’s at least 10-15 hours of research. This doesn’t mean you won’t have volatility, but it does give you more comfort in knowing and understanding your investments during the difficult times which allows you to be patient. The biggest culprit for an investors worst investment was lack of research with 20% saying this was the cause. This doesn’t surprise me as many people are quick to jump into the hype or invest in something because a friend or family member thought it was a good idea. Unfortunately, like the survey shows we have seen this work out poorly for many investors. Another big culprit for the worst investment was high risk with 13% of respondents citing this reason. In today’s society people want to try and make a quick return, but that is not how investing works. People want to try and get big returns and they end up losing massively. We tell our client’s a reasonable target should be around 8-12% in the longer term. Anything in excess of this and you are likely taking big risks that could put your portfolio in jeopardy.
PCE
There wasn’t much in the Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred measure for inflation. The headline number was up 3.4% which was the same as last month. The core PCE, which excludes food and energy was up 3.7% and was one-tenth lower than the reading in August. Core PCE hit a peak around 5.6% in early 2022. With the aggressive increase in short term rates, the recent increase in the 10-year treasury, and the resumption of student loan payments likely slowing the economy somewhat I still believe the Fed should allow these hikes to sink in and evaluate where we stand in the coming months.
Recession
It is interesting how many people believed we were going to see a recession in 2023, but yet the numbers keep proving the doubters wrong. Today’s Q3 GDP report showed annualized growth of 4.9%, which topped the estimate of 4.7%. It’s important to point out that this report does account for inflation. The primary driver of growth here was the consumer as spending increased 4% in the quarter and accounted for 2.7 percentage points of the total GDP increase. Both goods and services saw nice increases as spending grew 4.8% and 3.6%, respectively. Gross private domestic investment also saw a major increase of 8.4% and accounted for 1.5 percentage points of the total GDP increase. Within this category the change in private inventories was the major contributor as it accounted for 1.3 percentage points of the headline number. Government spending and investment also grew 4.6% and accounted for 0.8 percentage points of the headline number. The only detractor in the report was trade as the net exports of goods and services took away 0.08 percentage points from the headline number. While I believe this will likely be the highest GDP report we see for some time, I do believe we can still avoid a recession as the consumer remains in a good spot.
Financial Planning: Annuity Sales Continue to Grow
As market volatility continues, annuity sales continue to climb. Last quarter annuity sales hit $89.4 billion which is an 11% increase over the 3rd quarter of 2022, according to LIMRA. Sales reached a record in 2022 and that record may be beat in 2023. This is common during times of uncertainty in the market as investors and retirees look for safer places to put their money and many advisors are happy to sell them. This can feel more comfortable in the short term, but typically leads to underperformance in the long term. Retirees must remember that inflation and longevity risk, in addition to market risk, need to be factored into their retirement income plan. Annuities reduce portfolio volatility and can provide peace of mind at the expense of performance. Even in retirement, assets need to grow to outpace inflation and provide income, and lower performance increases the risk of running out of money too soon.
Household Net Worth
Household net worth from 2019 to 2022 increased by 37% according to data from The Federal Reserve. The real median net worth was $192,900 at the end of 2022 compared with three years ago when it was $141,100. This is one reason why the economy is staying strong on top of the strong jobs market. The large increase in net worth was accomplished by an increase in home ownership rates, the increase in home values, higher stock prices, and a bigger participation in investing in general. I continue to believe as long as people have a job, they are not worried about losing that job, and they have assets like investments in real estate and stocks, they will complain about higher prices in the economy, but they will continue to spend.
Gas Tax
As time passes, the issue of the gas tax revenue decline is becoming more of a concern. It is not just from electric vehicles, but also cars have become more fuel efficient. It is a problem across the country with states like Michigan who lost $50 million in gas tax revenue from 2019-2021 and I’m sure that is even higher now. On the Federal side, there’s a proposal called the “stop EV free loading act.” Washington would impose a $1000 one-time fee on a new EV and an additional $550 on those weighing over 1000 pounds. I don’t think that would be very effective. I like the Texas plan better which would add $400 to register an EV and then $200 every year after that. There are different ideas being tossed around on how to get revenue for roads, which include miles driven, fuel efficiency, rural versus urban locations, owners’ income level, or a combination of all four. Those all makes sense to me, except for basing it an owner’s income level. This is because right now the gas tax has nothing to do with anyone’s income, just how much you use the roads. I favor either a higher registration cost or based on miles driven but not if you are currently driving an internal combustion engine because you’re already paying the gas tax. Something needs to be done or else we are going to have some terrible roads in the future, although here in San Diego we already have that problem! Let’s hope it will be equitable for all.
Macallan 1926
I’m not a big drinker, but sometimes I do like to have a good scotch. If I’m going to have one, I’d like to have something that’s on the more expensive side since I don’t drink that much. On November 18 at Sotheby’s in London, a bottle of scotch, the Macallan 1926, is going to be auctioned off and is expected to receive somewhere between $900,000 to $1.4 million. I’m sure whoever buys that bottle will be kept secret. The Scotch has matured in a Sherry cask for 60 years. I’m sorry, I still don’t see the benefit of spending that much for something that can be consumed and then it’s gone.
Holiday Strikes
Thanksgiving is now less than a month away, which brings up the holidays. This is very important to the entertainment industry and automobile industry which are facing strikes from their workers. I remember when I was younger, a strike for the automobile workers that went through the holidays, it was terrible for the workers and the union as well for putting their members through a strike during the holidays. I don’t believe the unions will want to put their members through a strike during the holidays and more pressure will be put on the unions to seek a deal with management in both industries. This this will be two negatives in the economy that will be put behind us and I believe big positives for the companies in these industries as they can then focus on moving forward with good times ahead. They can then catch-up on production of automobiles, TV shows, and movies. The positives will come, be patient.
Home Affordability
With the 30-year fixed mortgage now around 8%, it is at its highest level since 2000. This has pressured home affordability to its worst level since at least 1989. According to the National Association of Realtors (NAR), the qualifying yearly income for a median priced home is now more than $107,000 which compares to just $49,680 back in 2020. When looking at affordability, the NAR has a 34-year-old Housing Affordability Index which looks at how much income the median family has to have to afford the median existing home. If the index equals 100, the median family has enough income to buy a home at the median price with a 20% down payment. The index assumes the family wants to pay 25% of its income toward principal and interest. The long-term average for the Housing Affordability Index is 138.1 and right now it stands at 88.7. The all-time high for the index was 213 back in 2013. There are three factors that could improve the affordability index: a decrease in housing prices, a decrease in interest rates, or an increase in incomes. To get back to the historical average for the index, rates would need to fall to 3.55%, incomes would need to increase by 63%, or home prices would need to fall by 35%. I still believe the most likely scenario is that home prices go nowhere over the next several years as incomes catch up and rates fall slightly.
Apple TV
I recently read that Apple TV is increasing its monthly subscription 33% to $9.99 up from $6.99. As I thought about this, I realized I don’t know anyone that uses Apple TV nor have I ever heard someone say to me, I saw this great program on Apple TV. You usually hear they saw this great program on Netflix, Paramount, HBO or Amazon prime. Who out there is watching Apple TV?