The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. - Sir John Templeton
On the economy
Much has been made about the hotly anticipated recession coming circa 2020. Rarely has coming doom ever been so loudly announced by economists at every level.
“Manufacturing, trade and investment are weak around the world,” Chairman Jerome Powell broadly declared on June 10th in testimony to Congress. U.S. economic data has been weakening under the strain of the US-China trade conflict. The job market has been losing steam, amid a pause in business spending, and corporate earnings have been floating back to earth as we get farther from 2018’s stimulus-boost.
Chairman Powell has also been very transparent about how the Fed will respond; there is little doubt in the financial community that the Fed will lower rates in late July. It is considered so likely that online banks Ally Financial and Marcus by Goldman Sachs preemptively lowered rates on their high yield savings accounts in June1.
Reducing borrowing rates for a U.S. population that is already awash in extraordinary amounts of debt perpetuates a dangerous situation. Years of cheap debt have not resulted in strong, healthy growth. Instead it has been a weak, slow recovery from the Great Recession marked by the highest corporate debt levels ever and extreme wealth disparity. Yet the Fed must feel enormous pressure to jolt the system and keep the party going at any cost.
Europe has never been able to keep it’s party on consistent footing since 2008.2 Germany’s GDP has declined for over a year; the auto industry is undergoing intense disruption and consumption is slowing, as it does towards the end of business cycles. The UK’s GDP most likely contracted in the first half of 2019, amid the Brexit mess with no cleanup in sight. Europe’s 3rd largest economy in France continues to struggle with high unemployment in the 9% range and it’s own sluggish GDP growth, or lack thereof. Investor sentiment and most every other metric of financial success in the Eurozone is off.
There are some winners in the global economic game. Southeast Asian countries, especially Vietnam and Cambodia, are the current trade war beneficiaries, as companies relocate factories and investment.
On the markets
Market valuations remain inextricably dependent on the government-driven, interventionist policies of fiscal and monetary stimulus, tax cuts and lately global trade tweets.
The adage “sell in May and go away until St. Legers day” seemed like prescient advice. Generally this investment advice is not worth following, and lacks any fundamental, technical or seasonal conviction. But this is not most years or even most eras. Prompted by several presidential tweets, the trade war got ugly again quickly and the quarter was defined by May’s sharp market pullback
(-6.58% on the S&P 500). It felt serious on the back of Q4 2018 and every market retrenchment since 2008. However, the action was normal in the way that
+/- 5% drops are normal, in every year not named 1954, 1958, 1964, 1995, or 2017, going back the last 70 years.
Less normal is the bond market, which continues to send warnings with its inverted yield curve formation. While few relish a lesson on bonds, know that higher yields on shorter, 3-month issues than on 10-year issues, is a reliable predictor of coming economic gloom.
In the short-term, the focus will be on business earnings as the key to whether stocks continue to rise or begin to fall. Investment banks may give us the biggest clue for the near future; if they have done well, it is likely that their clients, which include the world’s largest companies, have too.
On personal finance
While life spans have grown longer, jobs have also become less physically demanding. Now more and more Americans are planning to work forever. One in four workers aged 50 or better responded to a recent poll and stated that they never plan to retire3, highlighting a cultural shift away from the ultimate pursuit of living a life of leisure after 65. Perhaps they simply “love what they do” and will die with their work boots on. The better bet is that 25% understand that they do not have enough saved to make a decent retirement life a reality.
Catching up on savings is hard to do, and sometimes just darn impossible. One of the biggest buckets to fill is for healthcare expenses. Medical costs in today’s dollars are estimated at $285,000 per couple in retirement - staggering. 4
So what can you do? You can settle into your workplace and its benefits until age 65 and then switch over to Medicare. You can work longer until your social security maximum benefit kicks in at age 70. You can eat healthy and exercise, just like our doctor’s advise. But in addition to all of that, savvy planners save.
One of the best savings accounts out there is the Health Savings Account (HSA). Only available if your regular medical insurance is an HSA-eligible plan, this account lets you save thousands of dollars annually to be used years later for health related expenses. It is triple-tax free too – meaning contributions, growth and withdrawals have the opportunity to be exempt from taxation.
The estimated $285,000 number does not include long-term care insurance premiums or any home care costs at all. In that case, anyone in the neighborhood of age 60 might consider a modest long-term care policy. A couple with over $2.5 million in assets can call themselves “self-insured” but one with less means should look at a checklist of considerations for whether a policy, or alternatively a life insurance policy, would be helpful in these scenarios.
While many of us would deliberately avoid this conversation until absolutely necessary, procrastination will never help us answer the question better than a proactive process that involves your loved ones.
Disclosure
Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.
Investment Advisory Services offered through Integrated Advisors Network LLC (IAN), a Registered Investment Advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
This information is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Serene Point Advisors and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.