Complete Wealth Management With Dave Alison

Lessons from Q3 Market Performance and Q4 Market Intel | Episode 10

• Dave Alison, CFP®, EA, BPC • Season 1 • Episode 10

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In this episode, we will recap the stock market performance in Q3 of 2023 and talk about the 3 key themes on the minds of investors as we head into Q4 2023 during our market intel report.

We will discuss...

👉 Why haven't higher rates caused the economy to slow more?

👉 What might come next for interest rates?

👉 Is now a good time to consider adding fixed income to portfolios?

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The information provided in this presentation is not intended to be individual investment advice or legal advice.  The information provided is for informational and training purposes only.

Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Dave Alison:

Hey everyone, dave Allison with the Complete Wealth Management podcast.

Dave Alison:

In today's episode, we're going to be doing a quick recap on Q3 2023, what's happened in the markets and, more importantly, take a look at our Q4 Market Intel report. After surging the first half of the year the market surging the first half of the year we started to lose a little bit of ground in Q3. Investors started to snap out of their optimism and some of the worries about the economy began Again. These big questions is a recession coming? Is this bull market out of reach? I want to start off with just a quick recap. If we look at the major indices out there the S&P 500, which is really the broader US market it's the 500 largest companies in the United States they lost a cumulative 3.7%. The tech-heavy NASDAQ index lost about 4.1%, while the Dow Jones those bigger blue chip companies in the US was down about 2.6% in Q3 2023. What we have to remember is the market ripped in the first half of the year. We saw all three of those indexes post fantastic gains. This type of volatility is somewhat normal, specifically with all the headwinds like interest rates, public data, recession indicators, what's going on in US politics and some of the geopolitical risks that are out there. I want to just touch on some of the key takeaways from that third quarter.

Dave Alison:

First off, I will start by saying this isn't all bad. Progress is not linear when it comes to the stock market. It has its ups and downs. This pullback is not out of the normal. There is still plenty to be optimistic about. The economy is still chugging along. The labor markets continue to show some strength. You'll get to listen to me talk about that a little bit in our Q4 market intel report. We still have that major challenge ahead that the Fed must maintain that delicate balance between keeping interest rates high enough to fully douse inflation while not triggering a recession. The bottom line is there's a lot of data Everybody is very focused on microanalyzing around interest rates, around jobs, around consumer spending, around debt, around how these higher interest rates are going to impact the economy. The key with all of this is staying flexible, looking for opportunities, sticking with your plan. Again, while Q3 was a slight pullback from what we saw in the first half of the year, still plenty to be optimistic about.

Dave Alison:

What I'm going to do now is I'm actually going to, in this podcast episode, turn it over to our Q4 market intel report where I share with all of our clients just a little bit of the key themes on the minds of investors today. Let's jump on over to the podcast and to that report. Hello everyone, dave Allison, founder and CEO of Allison Wealth Management, and I'm excited to join you today to talk about our fourth quarter market Intel report, and I am happy to be with you here today talking about our fourth quarter market Intel report. Certainly a lot going on in markets. We just came off of what I would call a little bit of a spooky September. We had our first pullback after the markets really ripped through the first half of the year.

Dave Alison:

But there's a lot going on, and what we're going to talk about in this video are really the three key themes that are on the minds of investors today, things that we're hearing about frequently. The first being why hasn't this higher interest rate cycle caused the economy to slow down more? Then we'll spend a little bit of time talking about what might come next for interest rates and then, third, last but not least, we'll talk about is it a good time to consider adding fixed income to your portfolio? So this first key theme that we're going to talk about today. The big question out there why hasn't higher interest rates caused the economy to slow down more? We've seen a historic Federal Reserve interest rate increase, trying to combat and fight inflation. One of the tools that they use to do that is increasing interest rates, which should encourage people to save more, spend less, cool down company earnings, cool down prices out there. But we really, although we've seen inflation come down, we really haven't seen the economy cool too much. Part of the reason for that is if we look at some of this data.

Dave Alison:

I've mentioned in some of our previous videos that the one positive that we had of keeping the economy hot is that corporate balance sheets are very healthy. The amount of cash and the debt that they have is not leading us to believe, at least for the biggest companies in the United States, that there's a lot to worry about. Part of this was some of the decisions that were made throughout the pandemic. So, for example, on the corporate side, down at the bottom on this chart, you can see that over 50% of the S&P 500 companies these are the 500 largest companies in the United States had done a good job managing and refinancing their debt when we had historically low interest rates during the pandemic and in fact, 50% of the total debt of all of those companies is not going to mature till after 2023. So this means their interest payment and their debt servicing is going to stay fairly low, at least for the next six years.

Dave Alison:

If we flip over to the retail side, the consumer side, we saw the same thing in the housing market. You see, these higher interest rates, although they certainly would impact a new borrower today looking to go buy a home, they're not really impacting in real time those of us who locked in a very low interest rate during the pandemic when we saw historic lows. And in fact we see in the data, 61% of outstanding mortgages have an interest rate below 4% and so again, that's keeping the borrowing costs down, which is allowing people to have more discretionary spending to still go out there and buy things. Power the economy, drive company earnings. Now again, some things to keep an eye on is, of course, real estate prices I mentioned earlier. For those of us that are in our homes already and we've got these low mortgage rates locked in, it doesn't really impact us, but somebody purchasing a new house certainly has a harder time financing and taking out a mortgage, and this is why you start to hear a lot about the fact that real estate prices will have to come down at some point as long as interest rates stay high. The other thing to take into account here is any balloon payments or adjustable rate mortgages, and what happens to those payments when those mortgages come out of their low fixed interest rate and might adjust to a higher rate. So again, the big question on why haven't higher rates caused the economy to slow? Is the majority of the debt out there isn't being subject to these new higher rates, both on the corporate side and the consumer side?

Dave Alison:

Now some things that we're keeping a close eye on, as well as the labor market. We've spoke about this in other videos, and overall the labor market continues to remain quite strong, but we are starting to see some job growth is slowing. In fact, over the last couple months, a couple of the reports that came out actually showed monthly change in US non-farming payroll jobs actually fell below the long-term average, or at least the pre-pandemic average, for the first time since we came out of the global pandemic, and so at this point it's nothing to really ring an alarm about, but it's definitely a statistic or a data point we'll want to keep an eye on because, again, I've shared in many of these videos as long as we have a strong labor market, we should have a sustainable economy, but when that labor market starts to teeter right, when people start to lose their job, we certainly know that's a leading indicator of a potentially challenging economic environment ahead. The other thing that we're keeping a close eye on is credit card delinquencies, and so what we're starting to see and you can see it in the bottom part of this chart here is we're starting to see credit card delinquencies tick up since the pre-pandemic levels.

Dave Alison:

Now, what we saw is all the government stimulus that got passed out during the pandemic elevated people's savings rates. They had a bunch of cash on hand. They were out there spending it, they were paying off their credit cards as they were racking up credit card expenses. But we're starting to see now, for the first time since post-pandemic, that individual savings rates is declining. A lot of that stimulus is pretty much depleted, and now we're starting to see a tick upward in credit card delinquencies, and so that's another thing to keep an eye on because, again, if consumers aren't out there aggressively spending, it might create a slowdown in economic growth. On top of that, we're also starting to see things like student loan repayment resuming this month, and so these are all things that essentially take away from the US consumer's ability to go spend more money, because if part of their paycheck is going to pay off student loan debt or pay a higher interest rate on their credit card debt or pay a higher interest rate on their mortgage, that's less that they can go spend on some of the goods and services that drive corporate earnings.

Dave Alison:

Now, when we look at kind of where things are headed and tying into this second key theme, we know that, or at least we have a reasonable belief to think that the interest rate hikes are behind us for the most part. The market and the Fed are kind of debating back and forth on potentially one more interest rate hike. We've seen it anywhere from 25 basis points to 50 basis points, and really it just depends on how we continue to see the numbers and the data come out about inflation and job growth, because although we want to continue to battle inflation, the Fed has marching orders to try to not tail spin us into a recession and so far the progress on inflation supports the Federal Reserve pausing interest rate hikes, and so what we've seen in some of the numbers is headline. Inflation is now around 3.7%. We had a slight tip upward from a year ago to today, but most of that high, high inflation that we experienced during the pandemic has come down.

Dave Alison:

A couple of the key components is shelter. Shelter tends to be a very sticky component of inflation and when I say sticky I mean it tends to take a long time to bring shelter down because you know, think about rent out there. Most people rent an apartment within a one year agreement and so most landlords aren't going to lower rent within the agreement that they have. But when that agreement expires and they need to sign a new lease agreement, they might need to lower rent to be more competitive based on the reduced levels of inflation. We're also seeing core CPI data, which is really kind of the Fed's target, continue to come down and in the latest readings we're seeing positive movement in that.

Dave Alison:

But for the most part, I think, while most of us think that the rate hikes are mostly behind us, the market has an expectation that interest rates are gonna remain elevated for an extended period of time. We're starting to see some of the consensus is that the Fed might start cutting rates towards the end of 2024, but the reality of it is, if the economy continues to remain resilient, the Fed is not gonna be in any hurry to lower interest rates, and so, again, this is just something to keep an eye on on how these higher rates for longer might impact the overall economy. I mentioned earlier. The biggest of the companies, the very high quality companies, at least in the US, seem to have the balance sheets to be able to weather. They have record amounts of cash. They refinanced a lot of their debt. They're not gonna have to go out and take out new loans or issue new bonds at these higher rates. But it will be interesting to see how this impacts smaller companies, companies that maybe didn't have the capital structure or the advantage to refinance in low rates, or smaller companies who need to get new funding at these higher interest rates to continue to grow. And so we're gonna continue to keep our eye on different parts of the stock market and how it impacts different companies.

Dave Alison:

And, last but not least, as we land the airplane on our Q4 Market Intel Report, I wanna talk about the addition of fixed income into a portfolio, because some of you might be looking at adding more stability to your portfolio and, in a traditional market, fixed income provides that ballast, or that part of stability, as opposed to, for example, equities. Now we know, and we've seen over the last two years, that as interest rates rise, your fixed income can fall. In fact, in 2022, it was one of the worst years for the fixed income or the bond market, and so far this year, because we've seen interest rates rise a little bit more. This year we've seen bond values fall, but at some point, if we believe we're nearing the top of this interest rate cycle, it could actually bode to a favorable outlook for bonds, because if we do see interest rates start to fall, that could equate out to capital appreciation or gains in bonds, because, again, as interest rates fall, bond values increase, and so for those of you who might have money in cash or might want to reduce overall exposure or volatility to stocks, bonds could have a very favorable outlook in your portfolio right now. Not only do you get a high cash flow via the yields that bonds are paying right now, but you also have that double kicker of capital appreciation If we do start to see the economy get dicey and the Federal Reserve decides to start lowering interest rates to prop up or support the economy.

Dave Alison:

That could equal a positive price increase for bonds, and this chart just shows what that impact could be. So, for example, if we saw a 1% decrease in interest rates, that would equate out to about a 10 and a half to an 11 and a half percent return for bonds, for example, with the US aggregate bond index. If we see the Federal Reserve decrease interest rates by 1%, that could mean capital appreciation of about 11% in US aggregate bonds. You could see the next column over investment grade corporate bonds.

Dave Alison:

A 1% decrease in interest rates mean about an 11.87% capital appreciation on top of the income that you're generating, and then US Treasuries a little bit less risk than, of course, the aggregate index or corporate bonds. A 1% decrease means almost a 10% increase in capital appreciation. And so, although there's always uncertainty in the economy, there's always an outlook to align your investments with your risk tolerance, your volatility, your income and cash flow needs and your overall financial plan. So again, we've got a close eye on these three key themes. If you have any questions at all, please don't hesitate. Reach out to our team, reach out to your advisor. We're here to help.

Speaker 2:

Thanks a lot and we'll see you next quarter Financial planning and advisory services are offered through Presparity Capital Advisor, pca, an SEC registered investment advisor with its principal place of business in the state of Ohio. Allyson wealth management and PCA are separate, non-affiliated entities. Pca does not provide tax or legal advice. Insurance and tax services offered to Allyson wealth management are not affiliated with PCA. Information received from this video should not be viewed as individual investment advice. Content may have been created by a third party and was not written or created by a PCA affiliated advisor and does not represent the views and opinions of PCA or its subsidiary. For information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Advisor Public Disclosure website. For additional information about PCA, including fees and services, send for our disclosure statement as set forth on Form ADB from PCA using the contact information here. Please read the disclosure statement carefully before you invest or send money.

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Dave Alison, CFP®, EA, BPC

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