financial planning

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29 Aug 2024

Interest Rates Are Coming Down: The Good & The Bad (not too ugly)

By glen

Interest rates have been elevated for over two years now.  This is the result of the Federal Reserve fighting the post pandemic inflationary fire.  Higher rates are the primary way to lower inflation, and this is a time tested remedy, rewarding savers, while punishing borrowers and some investors.

Let’s look at where we are now, where we’re headed, and the anticipated impact of the coming changes.

Where We Are

Higher rates have rewarded cash savers for the first time in a generation. With money market rates exceeding 5%, it’s been a nice return for zero risk.  CD yields have been juicy too.  It’s a boon for those who can’t stomach investment risk, and very nice for those of us who hold some cash in a diversified portfolio.  For others it has been a painful struggle.

Bonds are important to all but the most aggressive investors and bond prices tanked as rates were pushed up.  A bond’s price moves inversely to yield (interest rate).  Yields going up means prices going down, and that’s painful when bonds are supposed to offer safety.

Home prices spiked as the pandemic peaked, and the value of everything went up all at once due to the flood of cash that led to the inflation spike.  This was followed by a painful increase in mortgage rates.  These are the highest mortgage rates in a generation, keeping many people out of the home market.  People with super low mortgages had no incentive to move, and trade up or downsize, which translated to a lack of sellers and homes families and aspiring families could afford.

Lending markets of all types have struggled making it harder for the economy to grow, while higher rates have tamed an economy that was on fire with inflation.  The list goes on regarding the pain of higher rates.  Auto loans have been a burden for many families, and small businesses have struggled with financing because they tend to borrow for shorter terms at rates that are higher even when rates are “normal”.

Where We’re Going

Inflation by all measures is trending back toward pre-pandemic norms, which is around 2.5%.  The job market is finally showing some signs of slowing.  This combination frees the Fed to begin cutting rates, and they’ve made it pretty clear this will begin at their September 18th meeting.

The market anticipates three to four rate cuts, totaling 0.75% to 1%, by the end of 2024, with a potential 2% drop over the next year. However, economic conditions can change rapidly.

The prices of longer term bonds have already begun to rise in anticipation, with people who sell bonds for a living waxing philosophically about the once in a generation opportunity in bonds.  In my humble view, this is just getting back the once in a generation loss we experienced as rates spiked.  Either way, bond prices rebounding is great news, getting us back to a new normal.

Mortgage rates will drop significantly as well.  They are already down more than 1% from highs in many markets.  That trend will continue, and hopefully, the residential real estate market will rapidly thaw as we head into spring.

Car loans will drop, allowing families to make better transportation decisions, and keeping auto workers employed and spending those paychecks further bolstering the economy.

Risk averse savers will have to say goodbye to juicy money market and CD rates.

Wrapping It Up

In many ways, this marks the end of pandemic era financial turbulence.  The ride down in rates will be refreshing for all but the ultra-conservative saver.

The trick for the Federal Reserve will be getting rates down fast enough to prevent a recession, which markets call a soft landing.  While bond prices may move quickly in economics there is a strong belief that it takes six months or more for any rate change to fully play out in the economy.  A September rate cut of ¼% will not be felt in American homes and businesses until March.  If a recession should happen next year, the consensus is that it will be short and shallow, with the headlines being worse than the reality for most.

If you have been enjoying the high money market and CD rates, we’re here to help you build a portfolio that meets a conservative risk tolerance for the long run.

 

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

25 Jul 2023

Why You Should Check Your Social Security Account

By glen

Social Security is often an afterthought for many people when it comes to planning for retirement.  Claiming Social Security can sometimes feel like a long way off, and it’s always something you plan to look at when you get closer to retirement; however, it’s important to stay aware of Social Security during your working years for several reasons.

It’s Worth What?

While Social Security pays out monthly, once you decide to start taking benefits, those payments over time can also be seen as a single asset by asking the question: what is the sum of those payments assuming we live to a ripe old age?

The answer for most of us ranges from hundreds of thousand dollars up to almost $1.3 million for some workers.  While we can’t simply request a lump sum check, those payments are equivalent to that kind of value!

Compared to your other retirement accounts, this is probably a piece of your retirement picture that merits attention.

When To Take Benefits

The question of when to take Social Security can be tricky.  The textbook answer is becoming 70 to maximize the benefit.  If your full retirement age is 66, your payment will be 32% higher if you wait until 70.

This may not be the right answer for everyone.  Do you want to work until 70?  If you want to retire before 70, do you have the savings to carry you until 70?  Are there health concerns that impact how long you expect to live?

The planning software we use at Buoyant Financial allows us to model various scenarios with clients to help optimize this decision based on their entire financial picture and goals; however, if you review your expected benefits periodically, you can begin to see how timing impacts this important decision.

Did They Get It All Right?

When reviewing your Social Security account, you can see the earnings used each year to calculate your benefit.  If something doesn’t look right, you may want to take action.  Did you have an employer withhold for Social Security, but you don’t see any earnings during your years with that employer?  If something doesn’t look right, you may want to reach out to the former employer or consult a CPA specializing in Social Security.  Yes, Social Security can get complicated enough that there are people who do nothing but specialize in assisting with benefits; however, these are pretty uncommon situations.

Review Your Social Security Account Annually

The easiest way to review your Social Security account, including your most recent statement and summary of expected benefits, is to create an online login.

Simply go to: https://www.ssa.gov/myaccount and create an account.  Once you do this you’ll also begin receiving an annual statement via email, which is great time to login and look at the account.

Wrapping it Up

Social Security is an important part of your retirement plan.  While there may not be a lot of decisions to make prior to retirement, it makes sense to give it some attention each year to review your expected benefits, and make sure your information is correct.

When retirement time comes, you’ll be glad you did!

 

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

18 Dec 2020

A Rocky Road to a Bright New Year

By glen

Despite the pain wrought by the virus, there is finally a light at the end of the tunnel.  The virus forced many of us in the investing world to become armchair epidemiologists since it’s nearly impossible to look at the economy without looking at the virus too.  

When I wrote about the pandemic in the spring, some of the models were showing numbers that seemed impossible, and by September those enormous numbers seemed even more impossible.  Unfortunately, we’re now living in a world where those painful numbers have become reality.  

The good news: we’re on a bright path forward thanks to effective vaccines being rolled out in real time.  A new normal finally seems within reach.     

We’re not looking at a setup for the greatest year the markets have ever seen.  As with the rest of our lives, we’re looking for a new normal, a post virus world that looks more like what we remember.  It will take at least two years for the economy to really move past the virus when you look at interest rates, unemployment, inflation, and volatility. 

Since the recession wasn’t driven by a financial meltdown, the monetary and fiscal stimulus measures were quite potent and effective.  But, these measures come with the price of having to be “unwound” over time.    

The stock market is currently overvalued by almost every measure, which was caused, in part, by irrational exuberance coupled with extremely low interest rates.  We’ll probably see a pull back, and that’s not all bad since we ultimately want assets priced rationally (there really is such a thing).  

As the virus is slowly brought under control, and our lives return to a new normal, there will be an increase in demand for products and services, which will be a source of economic strength.  This demand will push corporate earnings up, and at some point in 2021, stock prices and the underlying corporate earnings will meet closer to long term averages.  

A new normal will take longer in the world of interest rates.  The Fed promised that rates will remain low for years, and history tells us they will make good on that promise.  The downside: we could see real inflation for the first time in decades; however, it should be easy for the Fed to quickly tame any spikes above target.  

From a bond investor’s perspective, it’s important to keep in mind that if inflation goes up 1% and bond yields go up 1%, you’re in the same place, you’re not really enjoying a higher yield.  Inflation will be important to watch given the amount of money “printed” this year.  

After the tragedy of 9/11, things were never quite the same again.  There was a new normal, and with time, the trauma passed, receding into history and memory.  The post-pandemic world is likely to be similar, things will never quite be the same again, but with time we’ll reach a new normal, and this period will fade into memory. 

I wish you happy and boring holidays in the hopes that a subdued holiday season this year will give us many more in the future!  Please follow best practices around all things pandemic, such as avoiding large (or any) gatherings, wearing a mask when you’re out and about, and when the time comes, please get those shots.    

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

19 Sep 2020

Stuck in the Middle with You: Clowns & Jokers

By glen

Thinking about this post, the Stealers Wheel classic kept coming to mind.  We seem to be at the natural half time of the COVID pandemic, medical experts have been consistent in that we’ll probably see a vaccine during the first several months of 2021, which means we’re currently stuck in the middle.  Stuck in the middle is also the story of US markets.  The bond market and Federal Reserve are priced for the absolute worst-case scenario, and the stock market is priced as if things couldn’t get any better.  Clowns to the left, jokers to the right, but none of this feels very funny.  

I often mention to clients that the bond market tends to reflect a smarter, longer term view, and the stock market is naturally more speculative and prone to craziness.  On September 16th, Fed chair Jerome Powell made it clear that rates would remain at zero until at least 2023, and the Fed was willing to watch inflation exceed it’s target.  They’re essentially saying things are so bad, we’re going to do everything we can to stimulate the economy until it overheats.    

This isn’t ambiguous, in the past they might have said something vague like: “until conditions change.”  The new language is very clear, and while open to criticism, nobody trades against the Fed because the Fed always wins.  They wield enough power to put the bond market where they want it, and keep it there for better or worse.  So, the bond market is in line, and has been in line.  To put this into perspective the 10-year US T-Bond is currently yielding around 0.63%, over the last 20 years the average has been closer to 3%.  People buy bonds to protect money, and that buying pushes yields downward.  After nearly 7 months in COVID world, the bond market remains priced for the end of the world.  These clowns are sad, but tend to be smart too.  

The stock market on the other hand is priced as if it were in some other magical world.  It seems to ignore that unemployment has only come down to where it was during the great recession of 2008.  It seems to ignore that overall economic output has been knocked back to 2018.  It seems to ignore that corporate earnings, while recovering, are nowhere near where they were in February, and are much harder to forecast given all the uncertainty we face. 

The value of stocks can be measured by the price to earnings ratio.  This simply looks at how much you’re paying for $1 of earnings.  Looking at the largest US corporations (S&P 500), investors are currently paying around $26 for $1 of earnings.  Last year, when the economy was solid, this number was around $23, and historically back to 1970 this number averages closer to $19.  What do these jokers know that the clowns don’t?  Nothing. 

There are many explanations as to why stocks prices have been driven up.  Some of this is Fed driven, when rates are at zero stocks are naturally worth more for reasons I won’t bore you with here.  Some of this is driven by mom and pop investors with too much free time on their hands, trying to get in on the action.  Some of this is driven by gamblers with a habit to feed, and a lack of sporting events (the sports betting market is measured in the hundreds of billions).  The jokers seem to be running wild.  

I’m stuck in the middle with you.  Historically, we know pandemics fade into history, and that the world is indeed not coming to an end, but the clowns are very depressed and scared.  Historically, we know stocks aren’t usually worth $26 for $1 of earnings even during the best of times, the jokers have lost their mind running with lady luck.  

The real answer will be somewhere in the middle.  Long before 2023, as inflation rises, the Fed will allow longer term rates to rise while keeping their promise of a zero overnight rate.  Stocks will find fair prices as earnings stabilize, and the realities of a long recession take a toll on corporate earnings.    

With clowns to the left of us, and jokers to the right, the only place to be is in a diversified portfolio of stocks and bonds reflecting your risk tolerance, and retirement goals.  

We’re happy to be stuck in the middle with you, please reach out if you have questions, or would like to talk about your financial plan and portfolios.  

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.