Have you heard of a vibecession (pronounced like recession but beginning with “vibe”)? Apparently the term was coined by an economics blogger a couple of years ago and it’s been showing up quite a bit lately. I heard some people discussing the term the other day as if it were old news. Well, not to me…

We’ve discussed this idea several times before but it goes something like this, according to the blogger, Kyla Scanlon, who wrote an interesting piece about her idea back in 2022 (a link is below if you’re interested).

“Vibecession – a period of temporary vibe decline where economic data such as trade and industrial activity are relatively okayish.”

Relatively okayish – I like that. It seems to meet the moment. To me, a vibecession happens when enough people feel bad enough about their outlook, regardless of their current situation, that they cut back enough on spending for it to impact national economic data. A self-fulfilling prophecy, essentially. Have we seen one and/or are we in one? It depends on who you ask.

Sentiment was definitely negative in 2022 when the termed originated. Inflation peaked that summer and the Fed quickly raised interest rates to fight it. Stocks had a bad year as did bonds. Median national home prices dipped in response. And consumer sentiment cratered that summer, as you would expect from combining negative forces like these.

All of that happened and we still managed to skip an economic recession, at least going by the official definition. But we absolutely saw a vibecession, or whatever else you want to call it, and it lingers for many. The issue now is that much of what fed into the confused and somber mood ended up being transitory, at least by traditional economic metrics. National average inflation has come back to more normal levels. Interest rates are high compared to recent history but aren’t especially high when compared to long-term averages. Bonds have been struggling while stocks have come roaring back, and home prices continue to make record highs. Additionally, the job market is in good shape and, perhaps surprisingly, investment in US manufacturing has been making a big comeback.

That said, consumers still say they feel down in the dumps. This is odd because, just to cherry-pick one contrary data point, people are flying. The TSA reports that roughly 2.5 million US passengers flew per day around Independence Day last week and 3 million flew last Sunday, a single day record! Perhaps that’s partly due to the average cost of plane tickets being lower than 2022, according to tracking from the website, Nerd Wallet. This is just one example but consumers continue to spend across the economy even as they express concern over inflation and the job market, to name a couple typical pain points.

So why are so many people still professing to be in good shape now but gloomy about their prospects? Look at the chart below from my research partners at Bespoke Investment Group? Pessimism hasn’t matched up with reality for a while now. Is this cognitive dissonance at work, bad data, or a symptom of some broader issue?

The reasons for this go far beyond the realm of personal finance. People point to the news and social media, politics, and so forth, as feeding into a general sense of negativity and unease. This shows up across the demographic spectrum but seems more prevalent with younger people. I don’t understand all the reasons for this. However, at least on the finance side it’s clear that those with assets have been doing much better than those without. This is by design since our economy and even entire financial system favors those who own assets like homes and stocks. If you rent and don’t have savings, you don’t feel increases in the so-called wealth effect. You don’t benefit from home equity improvement – home ownership is just more unattainable. And rising stock prices don’t help for the same reason. Lots of American consumers have seen inflation in recent years without a way to counteract it. Even the Fed indirectly punishes these folks because borrowing cost more when the Fed raises interest rates. Perhaps folks in this category are more inclined to be surveyed and that skews the numbers? But wouldn’t they be less likely to say their present situation is good? It’s confusing.

Enough negative sentiment can become a self-fulfilling prophecy. The vibecession concept has been showing up more in the culture lately if not yet in most macroeconomic numbers, so it must be gaining traction. Maybe it will reach critical mass or maybe it’s simply an indicator of a gloominess that can, perhaps strangely, exist amid optimism and growth. Whatever the answer this is certainly an odd situation we should all pay attention to.

Here's the link I mentioned above.

https://kyla.substack.com/p/the-vibecession-the-self-fulfilling

Have questions? Ask us. We can help.

With just one week left in the quarter let’s talk about rebalancing.

First, I am absolutely not one to make market calls or suggest this or that day is the right time to buy or sell. However, it’s hard to overlook the dramatic price and valuation increase of companies related to artificial intelligence.

This has been going on for a while but really took off when ChatGPT was released. Nvidia is the most newsworthy as the company’s stock is up nearly 160% this year after a banner year in 2023. I mentioned these points in a recent post but the value of Nvidia has continued to rise along with a handful of other big names and that’s been pushing major indexes higher. It’s also likely created some imbalances in your portfolio.

As of last Friday the Tech and Communication Services sectors are collectively worth over 40% of the S&P 500 (from maybe 25% pre-Covid) and this has been leading the index’s performance all year. Of the top ten holdings in the S&P 500 eight are within these two sectors with the outliers being Berkshire Hathaway and Eli Lilly. The names are Microsoft, Apple, Nvidia, Amazon, Meta, Google (listed twice in the typical ETF for this space, ticker symbol SPY) and Broadcom. The S&P 500 weights its holdings by market size and this is the current order. These stocks now make up nearly a third of the S&P 500 by themselves and about 87% of the two sectors just mentioned. Year-to-date as of last Friday the typical Tech sector ETF, ticker symbol XLK, is up about 19% versus the S&P 500 up 15%. Compare this to a common S&P 500 index, ticker symbol RSP, that weights companies equally instead of by size. RSP is up a little better than 5% YTD. Talk about a top-heavy market!

Some compare this to the Tech Bubble and worry that a “pop” could happen any day. There are lots of reasons why this isn’t the case and I tend to agree with most of them, so anything you do with your investments shouldn’t be done out of fear. Instead, imbalances like this present opportunities for basic portfolio maintenance.

One idea is to take some profits. Not sell everything and head for the hills, just rebalance by trimming back a bit because the rest of the market is doing fine.

The easiest approach is to trim from common stock holdings in the companies listed if you have any. This can be taxable if these positions are held in a non-retirement account so you’ll want to be thoughtful about realizing capital gains. Ideally you hold some of these stocks in an IRA or Roth IRA where you can sell without tax concerns. How much to sell depends on your allocation plan, model portfolio, and so forth. In general you could cut 10% or perhaps trim by a position’s YTD performance and plan to repeat should prices continue higher.

If you’re like most people, however, you don’t hold common stock in these names but instead have indirect exposure via mutual funds and index funds. You can double check the holdings within your funds via Google and probably at your custodian. But since nearly 80% of the Tech sector and over 90% of Communication Services is primarily comprised of these companies, trimming from either sector fund, if you have one, should be obvious. Beyond that, a broad market stock fund or anything labeled “Large Cap Growth” in your portfolio should indirectly trim these names as well.

You can do other things to work around growing positions, such as buying non-correlated sectors and asset classes. You could also give appreciated shares to charity from your brokerage account or from your retirement account as part of your RMD, but those details are beyond the scope of this post.

Again, it’s been a good year so far for stocks. Who knows what the second half will bring but taking time to trim your winners and give to your losers (I hate phrasing it that way but it works…) or to generate excess cash for spending needs is the essential thrust of rebalancing.

What if you never rebalance? Are you missing out on anything by rebalancing? Typically, without rebalancing your portfolio grows more top-heavy over time. This makes you feel more of the sting when markets turn as they always do. You can miss out on some additional performance when you trim your winners. However, since none of us has perfect foresight we leverage processes like rebalancing instead of simply winging it. It’s counterintuitive and this makes it hard, but having practices like rebalancing really helps keep you on a good financial path over the long term.

I’m doing stuff like this for you already if I’m responsible for managing your portfolio, but feel free to ask questions. Otherwise, we’re all watching to see how AI shapes our world and our markets. Just don’t be too passive with your investments and allocation along the way.

Have questions? Ask us. We can help.

Okay, I’ll come right out and admit to being a little out of touch with the reality of social media. My (now young adult) kids sometimes chide me for this. I use Facebook only superficially. I’ve watched a few videos from a singer/songwriter I like on Instagram. And of course I’ll watch stuff on YouTube, but I don’t really surf around and I don’t follow anybody.

I also don’t use Twitter (I refuse to call it “X”). I tried some years ago but quickly gave up. Since I’m self-employed and thankfully not looking for a job I also don’t use LinkedIn much. And I’m certainly not on TikTok. I’ve tried a couple of times but TikTok’s format and explosion of short videos just isn’t my cup of tea.

That said, I do read about what’s happening on TikTok and the rise of “finfluencers” offering quick and casual videos about personal finance. It’s troubling or at least unsettling. Some of these people have millions of followers and pull down $100,000, even $300,000 a year, sometimes much more. They do this indirectly through paid ads within their TikTok, Instagram, and YouTube videos via algorithms at Google, brand sponsorships, and by directly selling products.

I’m sure that structure isn’t news to you because it isn’t to me, but what I don’t appreciate is the lack of disclosure on all this stuff when it comes to people providing financial advice, education, or whatever they might choose to call it. I want people, and especially younger people, to get educated about how the financial world works. Personal finance isn’t taught in schools very much anymore, so people need to get the information wherever they can and that’s fine. However, I question how much value can be found in videos lasting a minute or two. Granted, some of these link to longer videos on YouTube, but how many people make it that far?

After reading more about this in recent days I spent some time looking at finfluencer content on TikTok and was reminded of just how scattershot the information is. It’s also really hard to locate meaningful disclosure about the finfluener’s credentials and how they’re paid. It was also interesting to see the fluid nature with which content creators move between providing information and infomercial. At times it seemed like the sales pitch was more natural than the primary content and I wondered how much the person actually knew about the topic. I mean, these days you can just ask ChatGPT and pretend to know a bunch of stuff.

For example, one creator extolled the virtues of a credit card as part of a life hack process while leaving out a bunch of fine print. I understand adding more detail would make the video too long, but he left out quite a bit. The viewer was then directed to a list of favored cards below which linked to an affiliate program, which eventually linked to the credit card company and the relevant details. Does the viewer have any recourse against the finfluencer for providing incomplete or otherwise bad information? Was the credit card being touted actually “the best right now” for the viewer or the finfluencer?

Now, I don’t want to seem overly stodgy. People need to learn and the end can justify the means, I get that. Many of these creators are well-intentioned and their content is often interesting. If it’s sometimes a little basic and lacking in detail or risky to apply in the real world, maybe we can blame the short-form nature of the delivery platform. Or maybe it’s the short attention span of the viewer – which came first, I’m not sure. Either way, the result is something that’s common in my industry: often inexperienced people providing advice that’s really just a sales pitch.

So the main issue I have with finfluencers today is a lack of disclosure that would lift the veil, at least a little, on why they chose to discuss topics, if they have any expertise or training in the topic, and how they stand to benefit. I have to do this in my work. I have to tell you my background, training, and if I’m selling you something. I have to stay current with contuing education requirements. I have to tell you who my regulator is. And I have to tell you about conflicts of interest that impact our work together. I don’t see why finfluencers, who often provide advice with real-world consequences, don’t need to disclose similar information. Some do and that’s great, but most don’t. This is unfortunate because upgrading the professionalism of these folks would probably benefit a lot of people.

If you’re interested, here’s a great video on this topic from the CFA Institute. There are a few different things on this page so scroll down to the video from Richard Coffin.

https://rpc.cfainstitute.org/en/research/reports/2024/finfluencer-appeal

Have questions? Ask us. We can help.

The second quarter (Q2) of 2024 continued this year’s A Tale of Two Markets: AI Versus Everyone Else. Large indexes like the S&P 500 performed well but this was driven primarily by a handful of large companies. Otherwise, market breadth was mixed with performance growing worse as company size grew smaller. Bonds also continued their tale of woe while experiencing a couple of positive glimmers during the quarter.

Here’s a roundup of how major markets performed during Q2 and so far this year, respectively:

• US Large Cap Stocks: up 4.4%, up 15.2%
• US Small Cap Stocks: down 3.3%, up 1.6%
• US Core Bonds: about flat, down 0.7%
• Developed Foreign Markets: down 0.2%, up 5.8%
• Emerging Markets: up 4.4%, up 6.7%

As I just mentioned, major stock indexes in the US looked great on paper as average returns seemed to rise steadily throughout the quarter. The largest publicly-traded stocks related to artificial intelligence performed best. Microsoft, Apple, and Nvidia each ended Q2 with a $3+ trillion market capitalization and the worst performer of the bunch, Apple, was up 24% during the quarter. These and other popular Large Cap Growth names within the Technology and Communication Services sectors, like Google and Meta, now occupy such a large portion of the market that they massively impact index performance. Last quarter was positive because of this but performance could easily have gone the other way. This is plain when looking at benchmarks like the Russell 1000 that include the 500 largest stocks (similar to the S&P 500) and the next 500 smaller companies. According to my research partners at Bespoke Investment Group, this index rose by a respectable 3.3% during Q2. However, the top four stocks in the index added four percentage points of gain. Without them the remaining 996 stocks would have collectively averaged a small loss. Nvidia alone was worth almost 48% of the index’s gain. Besides the aforementioned sectors along with Consumer Staples and Utilities, up 1% and 4.6%, respectively, all other sectors in the US were negative during Q2. This is a reminder of how imbalances in the markets can be masked by average index performance and how this can promote investor complacency. Always look beyond the label – it’s what’s inside that matters.

This sort of imbalance isn’t unprecedented. Markets reflect the economy and substantial changes in market perspectives have coincided with every major development from the railroads to the creation of the internet. The rise of AI seems likely to be historically significant for the economy and markets, and maybe that’s a vast understatement. Only time will tell but we have to watch how these imbalances impact your portfolio in the meantime.

Beyond AI impacting the stock market, the bond market saw some positive moments during Q2 compared to recent quarters. Bond prices are highly sensitive to changes (anticipated or actual) in interest rates and rates were on the minds of investors again. As 2024 began investors expected the Federal Reserve to cut rates as much as half a dozen times during the year assuming inflation improved. However, inflation remained elevated and Fed officials indicated that rates could stay higher for longer. Investors quickly recalculated and the yield on the 10yr Treasury, an important benchmark, rose in April causing bond prices to fall. This reversed a bit in June as inflation and Fed policy forecasts seemed to improve. As Q2 ended the CME FedWatch website indicated investors were again expecting the Fed to reduce rates 3-4 times this year (and more into early-2025). These expectations could be overeager and have whipsawed quite a bit in recent weeks. This uncertainty will likely persist during the second half of this year.

So what to do about AI-driven imbalances in the stock market and the continued plight of core bonds. If you’re doing the “right” thing you’ll have diversification across asset classes (stocks, bonds, and cash), sectors (Technology, Healthcare, Financials, and so forth – there are eleven sectors in the US), and industries. Within bonds you’ll likely have exposure to those issued by the US Treasury, large corporations, and government agencies. You may also have bonds issued by states and smaller municipalities. You’ll have ready cash that pays essentially nothing in terms of interest, but you might also have some cash in a money market or CD at a decent rate. You have all these investment types so you’re not pinning your hopes on any one or two at a time. Sure, it would be nice to luck into having all of your money in Nvidia stock as it grows exponentially, but what if Nvidia got walloped or failed? I’m not suggesting this is likely. However, recall some of the many examples over time of massive growth followed by massive failure like Enron or maybe Pets.com. Those stories should stimulate a prudent desire to hedge your bets. Own it all in manageable and appropriate proportions. Then rebalance as needed based on a specific and repeatable process. You’ll get lift from AI-related stocks (or whatever else is popular at the time) while enjoying safety in numbers. You probably won’t beat the market on any given day but you’ll have a good chance of beating the system over the long run. And bonds are still helpful as a store of cash for the medium-term. You should continue to hold them in your portfolio along with complimentary instruments like short-term CDs and money market funds.

There’s uncertainty as we enter a new quarter, as always, but the economy is doing well and most of the stock market isn’t overvalued. I’m optimistic about returns for the rest of the year but I plan to stay disciplined and focused on long-term performance versus chasing what’s popular. I humbly suggest you do the same.

Have questions? Ask us. We can help. 

Your beneficiary designations matter and are easily overlooked, sometimes for years. You list them on your retirement accounts and life insurance contracts, and maybe on your bank and brokerage accounts. If you skip this step, perhaps assuming you’ll handle it later, the default option is often your “estate”, meaning your accounts have to go through probate.

We’ve discussed this in prior posts over the years but this concept is worthy of repetition.

The paperwork for some accounts, such as Schwab’s IRA application, often has a predetermined order of priority if you forget to name your own beneficiaries. First it’s your spouse and then your kids (natural or legally adopted) but the form doesn’t automatically include stepchildren. Third comes your estate as beneficiary and that usually means probate.

Is that what you want? Would you instead prefer to list your own beneficiaries to avoid ambiguity? Or do you have beneficiaries whom you’d like to receive an uneven portion of your account? Maybe charities? Or as is the case with the story I’m linking to below, did you list someone during what’s now a prior life and want to update that to your current situation?

Here are a few important points to remember when thinking about beneficiary designations.

• They’re per account and designations on one don’t apply to another. There’s nothing stopping you from listing your spouse on all of your IRAs, your grandchild on your Roth IRA, and charities on your life insurance, whatever you want. Your spouse typically has to agree by signing a form if someone else is a primary beneficiary, but you can get creative.
• Lots of account types can have beneficiaries. IRAs, Roth IRAs, your plans at current and former workplaces, even bank accounts, and of course life insurance. Adding beneficiary designations wherever possible is cheap estate planning.
• Beneficiary designations can override your will. Just because your will or trust lists your current spouse as beneficiary of “everything”, that usually has no bearing on an old 401(k) still held with a former employer that lists your ex-spouse as beneficiary.
• Accounts with named beneficiaries usually bypass probate. In my experience most beneficiaries (spouses, adult children, and so forth) get access to the funds in a week or two after signing some paperwork and submitting a death certificate. Compare that to probate in CA taking a year or more. Your beneficiaries can accelerate the process if your estate is small (less than $185K in CA currently) but avoid this if possible. And probate is expensive. Some sources suggest that 4% to 7% of an estate can go to various costs.
• Your beneficiary designations are revocable but durable – nothing changes without you! You should review your designations periodically to ensure they look right. For most people this is simple because you probably listed your spouse as primary beneficiary and maybe your kids as equal contingents. But I ask again, are you sure this is what you want? Do you want to equalize a financial gift for one kid by increasing another’s share of a retirement account? Have your balances grown and you want to shift who gets which account and how much, maybe considering tax consequences? Lots of options to personalize your beneficiaries if you think about it…

Okay, so on to the story that started the wheels turning this morning…

The following link goes to The Wall Street Journal and details a legal battle between brothers fighting to keep their deceased brother’s old 401(k) from going to a girlfriend he had decades ago. Her claim is clear – she’s listed as the 100% beneficiary of a specific account and there’s paperwork to prove it. The brothers’ claim is ambiguous – we don’t think that’s what our brother intended. Who knows what can happen in the legal system and I’m not an attorney, but everything I’ve learned over the past 20+ years in this business indicates that the former girlfriend is the decedent’s lawful beneficiary. Is that what the brother actually wanted? Who knows because apparently the only document he left behind was the beneficiary form he completed decades ago.

Don’t let that be you. Don’t let this happen to the person or people you feel should inherit your remaining assets. Don’t make them go through probate unnecessarily and help them avoid the legal system if at all possible.

You can check your account statements to see who you’ve listed as beneficiaries. If it’s not there, check your online portal. If you can’t find them anywhere, call the company! Or if we’re managing your accounts, reach out to us and we’ll tell you exactly how you’re set up and can assist with updating as needed.

One of the issues in this lawsuit was the former employer not making information from “old” paper documents viewable online. I’ve seen this before. Your beneficiary listing will say something like “on file” versus showing specific names. Trust but verify, as the saying goes. Doing so could save your beneficiaries a lot of trouble.

Here's the link to the story I mentioned.

https://www.wsj.com/personal-finance/inherited-retirement-savings-beneficiary-breakup-divorce-849e3ff2

Have questions? Ask us. We can help.

We’re in the final month of the quarter so let’s take a few minutes to review how markets have been performing and what’s been driving them.

The shifting sands of the inflation outlook and Fed policy continued to provide headwinds and tailwinds, depending on the day and sometimes the hour. Expectations have gone from multiple rate cuts this year to maybe one but probably none. The reasons why have been the same for months. Inflation has remained stubbornly high and overall economic activity has been chugging along nicely, which doesn’t provide any cover or impetus for the Fed to reduce interest rates.

However, a lot of these numbers are backward-looking. My research partners at Bespoke Investment Group regularly update a matrix of economic indicators and current numbers show momentum slowing down a bit. Maybe this matches up with inflation falling as well, only time will tell. If so, the Fed could lower rates later this year but then Election Day is coming up and the Fed has tended to hold firm on rates around general elections to stay out of politics. As of now the CME FedWatch Tool shows nobody expecting a rate change this Summer but this shifts to maybe 50/50 for the rest of the year. Investors expect the Fed will start cutting rates by early 2025, but not with much conviction.

This rate uncertainty has been moving stock prices and has helped cash to outperform bonds, which isn’t very fun for most investors. The Barclays Aggregate Bond Index (a good index for medium-term bonds) has been down almost a percent so far this quarter and about 1.6% this year. Longer-term bonds are down more. While there have been positive glimmers the situation with bonds doesn’t seem to be changing anytime soon, given the rate situation already mentioned. However, bond prices can turn quickly and that’s one of the reasons we still want to own bonds. On the positive side, money market funds are still paying good rates with no volatility and bank CDs offer about 5% for a year. However, money market rates aren’t guaranteed for any length of time as they are with CDs, so at least in theory those rates will change along with Fed policy.

The rise of AI and popular publicly traded companies in that space has also driven markets so far this quarter. And just like with the Fed, the AI boom has been with us for a while, often measured since the release of ChatGPT by OpenAI in late-2022. Nvidia Corp is definitely top of the popularity heap with year-to-date returns of over 120% and about 27% in the past month! Nvidia manufactures hardware and software used in AI infrastructure so the company being a proxy for the emerging industry makes sense. Distant (in terms of short-term performance) but popular seconds include Microsoft and Alphabet (Google’s parent company) with returns of about 11% and 23% this year and mid-single digits over the past month, respectively. These three companies are each worth around $3 trillion in market capitalization (share price X number of shares publicly available), with Microsoft leading at $3.2 trillion. That Nvidia is even close to that after such a short timeframe speaks to how aggressive the AI race has been.

This performance helped the tech-heavy NASDAQ index hit 17,000 for the first time this month and the Dow Joes Industrial Average briefly touch 40,000 in recent weeks. AI-driven performance has also helped the S&P 500, the typical stock benchmark, rise about 11% this year and about 1% this quarter, almost triple the Dow’s performance. This is due to the good luck of the S&P 500 in having more of these popular companies and bad luck for the Dow in having higher weightings to AI-related names like Intel, IBM, and Salesforce that have been getting trounced lately. I mention this because there’s a major dislocation in terms of where broad market performance is coming from. If you had picked the “wrong” individual stocks or were overly focused on the wrong part of the market this quarter and the past year or so, that could explain some underperformance.

Now, I’m not suggesting that you follow trends and fall prey to the so-called Greater Fool Theory. Instead, you should focus on being well diversified with the bulk of your investment dollars, especially what you have in your long-term retirement-oriented accounts. One could argue that certain stocks are overvalued but not that the whole market is overvalued. There’s lots of value out there if you know where to look. And diversification allows you to get some performance lift from the day’s popular stocks while limiting your exposure to being wrong.

Have questions? Ask us. We can help.