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.

Election Day is coming up fast and I’ve been getting questions again about which party is best for the markets. This happens every cycle and, as is the case with a lot of questions like this, it’s good to revisit the answer. And while there’s lots one could discuss, analyze, and worry about, there is only one answer. Simply put, in the longer-term Mr. Market doesn’t really care who sits in the Oval Office.

We’ve seen many examples in recent years of the stock market continuing to rise amid social turmoil and other cultural upheavals. Higher returns during these events can seem wrong or otherwise disconnected from reality. Protests and riots in the streets and the stock market rises. Wars overseas with all the horrific imagery and the stock market rises. But markets are firmly anchored in one reality: money. Mr. Market can and does respond to news in the short-term but always comes back to his primary concern. We saw during Covid how markets lurched when news directly impacted the economy but prices recovered quickly as things calmed a bit and uncertainty waned.

Quite frankly, I find this singular focus comforting in an otherwise topsy-turvy world.

So again, what political party occupying the White House makes for happy markets? As luck would have it one of my data vendors, YCharts, recently came out with a series of charts addressing this question from a variety of angles. Here are a few that I found most interesting.

The first chart shows the performance of the S&P 500, the primary stock market benchmark tracking the 500 largest publicly traded companies in the US, beginning with the Kennedy administration in 1961. Only two administrations since, those of Nixon and George W Bush, suffered overall negative performance for the S&P 500. There certainly were cultural and political issues at play in both administrations with consequences that still linger today. But both also suffered major economic issues. With Nixon it was inflation, stagflation, and the beginnings of one of the longest bear markets in history. With Bush it was the tech bubble bursting just prior to his election and then recession, followed by the Great Recession (call it unlucky or otherwise, but that’s a rough way to begin and end an administration) but the stock market recovered fully and then some as the economic issues improved.

The second chart looks at investing along with changes in which political parties hold power. While this might seem obvious, you would have wildly underperformed the stock market if you sat on the sidelines while “the other party” held office. Still, and as you can see in the chart, Republican administrations generated lower returns than Democrats but that was heavily impacted by the Nixion-era and Bush-era issues mentioned above.

Our third chart looks at investing amid a divided, opposing, and friendly Congress. You might think the market prefers one party or the other, but what Mr. Market really prefers is gridlock unless he can get the changes he likes: lower taxes, less regulation, and more government spending. (Markets have historically liked the Republican tag team when we look back to 1950, as shown in the chart below.) This primarily has to do with investors valuing the certainty, or at least less uncertainty, that comes from a divided government. This allows investors to feel more confident in their assumptions about the trajectory of regulations, government spending, and how both impact the fair value of stock prices. Toss politicians promising (and being able to act on) sweeping change into the mix and investors tend to worry, get defensive, maybe sell shares, and so forth, again unless it’s changes preferred by Mr. Market.

Ultimately, the question about which party does better for markets is sort of a political red herring. No politician or political party should say they’re better for markets. There are far too many variables impacting this issue, some of which play out over years, to say that definitively. So instead of worrying about this question it’s better to focus on having a plan and sticking to it, pivoting when needed, but remaining invested throughout all political administrations.

Have questions? Ask us. We can help.

Deciding when to retire is one of the biggest decisions you’ll make. And it’s hard! Understandably, most people first look to their finances: Can I afford to retire? What’s my target number and am I there yet, as if it were a destination. Don’t get me wrong, your financial situation is a huge part of the answer about retirement readiness but perhaps more important is the personal side of the question. Are you actually ready to retire?

This is a moving-target sort of question because our assumptions about what retirement means are often based on a past that no longer exists. For example and according to the Bureau of Labor Statistics, in 1950 you’d likely work well into your 60’s but had a life expectancy of maybe early-70’s, so it was work, work, work, followed by a gold watch and a relatively short retirement. That’s a paradigm that many still focus on today. Manufacturing made up almost a third of our economy back then, so a good rest was often needed. You had some personal savings and often a pension since at least a quarter (and half by 1970, according to the BLS) of the working population had one. And Social Security had only begun sending payments ten years before, so that was a relatively new phenomenon that provided extra security.

Fast-forward to the present and we’re working and living longer. At least on average in the US our life expectancy is now in the late-70s, although I usually stress-test plans for people out to early-90s and beyond. I actually can’t recall the last time someone wanted me to use a late-70’s life expectancy. This means we’re planning on typical retirement timeframes of 20 to 30 years, not the five years or so of the past.

But do we want to “retire” that long? Do we need to? We’re better off financially than our parents and grandparents were. We have more assets and our higher incomes go farther, even adjusted for inflation. For example, according to the American Enterprise Institute, it took nearly 100 hours of work earning average wages to a buy a washing machine in 1959 and nearly 168 to buy a fridge – today it’s a small fraction of that. However, one could argue that we feel less financially secure. DIY 401(k) plans have supplanted pensions as a retirement mainstay (less than 15% of working Americans have a pension now) and the Social Security system is a nailbiter. Whatever the combination of reasons, we’ve reversed a decades-long trend persisting into the 90’s showing the labor force participation rate declining steadily as people aged past their mid-fifties. According to the BLS, those age 55 and older increased their participation rate from 2002 through 2022, and this is projected to continue through 2032.

Even though there are movements extolling the virtues of retiring earlier, people still have a drive to work. Our work gets into our blood and this helps make it challenging to contemplate swapping decades of muscle memory for… what exactly? Some people rush into retirement only to find they never answered that question for themselves while others keep working for the same reason. Could we somehow work better for longer, instead of working until burnout? It’s tough to know the right answer because, in many ways, we don’t have a framework for figuring out what is, and should be, a very personal question.

Okay, let me get back to my point this morning before digressing too much farther. Here are some questions that might help.

What does retirement mean to you?

Have you ever practiced retirement with a sabbatical, or even an extended vacation? Long enough for the “vacation” to start wearing off.

If you had all the time in the world, how would you spend it?

How would you have answered these questions five years ago and how does that differ from today? What about five years from now? How would Future You answer?

Here’s a trio of stories from the Wall Street Journal that make me think of how we’re all redefining what it means to work and to retire as our economy and workplace evolves. The Journal has a paywall, so let me know if you’d like any of these and can’t access them and I’ll send them to you from my own account.

The first article deals with impressions of a WSJ journalist following her sabbatical.

https://www.wsj.com/lifestyle/careers/my-dream-break-from-work-wasnt-what-i-expected-81bc5841?mod=series_worklife

The second talks about retirement readiness from a personal perspective.

https://www.wsj.com/lifestyle/workplace/how-to-know-when-its-time-to-retire-b01cb741?mod=series_worklife

And the third article covers how focus work, or what’s referred to as “slow productivity”, is probably better for everybody compared with the frantic nature of multitasking that we’ve been trained to love and hate. Personally, I think if more of us could do this we’d get more enjoyment from our work, and probably be able to work longer because it would be less of a grind. And this type of work is likely to be valued more in the economy with the emergence of AI that will likely absorb rote tasks in favor of higher value work being done by highly-skilled and experienced workers. It also lends itself to project work, or other forms of consulting services that quite a few retirees end up doing (and enjoying!) for their former employers.

https://www.wsj.com/lifestyle/workplace/less-is-more-the-case-for-slow-productivity-at-work-ddbd7720?mod=wknd_pos1

Have questions? Ask us. We can help.

I hope you and your family enjoyed Memorial Day and held in reverence, if only for a moment, the ultimate sacrifice made by so many who served in our Armed Forces. As I typically write these posts on Mondays and since yesterday was a holiday, I slowed my routine down a bit. The result is this shorter but still important post.

I say important because today, Tuesday May 28^th, marks an improvement in the behind-the-scenes complexity of my industry. Starting now you can access your investment dollars a little faster as we’ve moved to a T+1 settlement period.

This is one of those things most people never think about until it gets in their way. Imagine you sell a stock in your brokerage account. When can you get the cash? Or say you just bought a share of stock. When do you fully own it? The answer to both questions is when the transaction settles, the date when ownership has formally transferred and payment needs to have been made. This may seem like it’s immediate, or at least should be, but it isn’t. After you click “sell” or “buy” there’s infrastructure working for you although you rarely see it. As of last week this settlement process typically happened within a regulated period of two business days following the trade date but now it will take only one.

This might sound like a small change and I suppose it is in the grand scheme of things. However, being able to access your money faster is always good news, right? Back in 2017 trade settlement on most investments was T (the trade date) plus three business days and this had been the case since the 70’s or 80’s, I think. Before that it was T+5 and not all stock exchanges had the same settlement periods.

Going back to the early days of the stock market here and abroad in places like Amsterdam and London where public stock markets began, settlement was measured in weeks. That makes sense given how delivery of paper stock certificates and money as payment were transferred via ship and horseback. But these days paper certificates are anachronisms you have to special order and usually pay a fee for. It’s all digital now so trade settlement should be fast! Of the hundred-plus-million trades placed each day in the US, most don’t even need a human to touch the settlement process. Eventually, through advancements in blockchain technology, the settlement period could be instantaneous, or T+0.

While there’s always more to it than what I’m mentioning here, the important takeaway is the practical impact of this change. Many mutual funds and government bonds already had T+1 settlement, but now pretty much everything does. This means if you’ve hooked up your brokerage account or IRA to your bank account, you can sell shares today when the market is open and be able to move or otherwise access the cash tomorrow (assuming the market and banks are open). Wires could go out then as well or, via the ACH system, you’d have money at your bank the following day. On the buy side you’ll have to pay for the purchase by the next business day, but this won’t necessarily impact most investors. So, faster is better.

I love this change because I’ve always operated with a sense of urgency when it comes to helping you with your investments and I absolutely can’t stand unnecessary delays or restrictions when sending money to you. It took seven years to go from T+2 to T+1. Who knows how long it will be before T+0, but I’ll take one day faster all day long until then.

Have questions? Ask us. We can help.

Before we begin, just a heads up that I’ll be missing next week’s post but will be back at it the following week.

Staying with the retirement theme from last week, let’s review the annual update to the Employee Benefit Research Institute’s Retirement Confidence Survey. Many of the sponsors of this survey are insurance companies or those engaged in selling annuities so there’s that bent to the research if you dig into it, but the report is still a good temperature check on how Americans are planning for and living in retirement.

I’m providing a link to the EBRI site below and to another industry-related site that summarizes the findings. This way you can dive into the details if you’re interested. Otherwise, here are some notes and charts that I think are most relevant.

When People Plan to Retire

You’ll see in the chart below that workers younger than age 55 most often report a target retirement age of 65. This has to be arbitrary and more or less tied to that age being the original Social Security full retirement age. Work until 65 and then retire – it’s baked into our cultural perspective. Why else would so many younger workers peg that age versus retiring between 66 and 69? What’s ironic is how the Social Security baseline age is now 67 and will likely be closer to 70 when younger people retire anyway. Interestingly, there’s a sizeable contingent of those over 55 who say they plan to work until at least age 70 or may never retire. I couldn’t tell from the report if this latter group skewed heavily to those with less savings, but it dovetails with our recent discussion of high labor force participation rates for older people.

Income During Retirement

The report compares current workers and retirees. Both plan to and actually rely on Social Security as an income source. However, more workers plan to leverage their workplace plan while retirees say they use more personal retirement savings and investments for retirement income. I’m not sure if that means retirees have the old workplace plan and aren’t using it as much or if they’ve moved the money into an IRA and that makes it “personal” in the context of the report. Whichever it is, some form of personal savings is obviously necessary to enable retirement because Social Security isn’t meant for full income replacement.

Some of the expectations versus actual results were interesting, such as with “Work for Pay”. Almost three quarters of workers report planning to work during retirement versus 25% of current retirees who actually work. Perhaps during mid-career it’s easier to think of a working retirement in the hypothetical sense but actually doing it after a full career is something else entirely. Otherwise, using annuities (or “a product that guarantees monthly income” – they do whatever they can to avoid saying annuity) is popular for planning but not necessarily for doing. Also in that camp were relying on disability benefits and a personal support network in retirement. These latter two didn’t show up in the chart below but I thought it interesting that they were included in the survey at all.

Other notes –

Almost two-thirds of workers feel confident or very confident about their ability to live comfortably in retirement. But nearly as many say preparing for retirement stresses them out!

Maybe this stress is due to nearly two-thirds of workers reporting having less than $250,000 saved, and a sizeable chunk of these folks having less than $25,000. How can so many of these workers report being so confident?

More than half of respondents said they are working with a professional advisor or at least plan to. That’s good so long as they get high quality objective advice from a “professional”, but I do worry about that. Obviously my opinion is biased, but how can workers receive the good advice they expect when the country’s “advisor” population is primarily comprised of salespeople? Otherwise, it’s a grab bag of information sources including family and friends (the most popular option for financial advice, by the way), employer-provided education, financial gurus, and even ChatGPT.

Debt, and large amounts of it, was reported as a major hindrance to confidence levels for workers and retirees. Debt can be a helpful tool, think of Archimedes and his lever. But overusing debt is one of those problems that only shows up after the fact and can be incredibly damaging to your financial health. Make paying down/paying off debt part of your retirement planning strategy and you’ll have a head start on being happier than two-thirds of people who respond to surveys like this.

Here are the links that I mentioned above.

https://www.ebri.org/retirement/retirement-confidence-survey

https://www.financialadvisoriq.com/c/4491534/588013/retirement_confidence_survey_charts?referrer_module=emailReminder&module_order=0&login=1&code=YW5WemRHbHVRR0psYzNCdmEyVnBiblpsYzNRdVkyOXRMQ0F4TURFM016Z3lNeXdnTlRBeE1UVTNPRFV6

Have questions? Ask us. We can help.

In recent weeks we’ve talked about how investor expectations around the Fed and interest rates have helped disturb markets this quarter. Just last week the “Magnificent Seven”, large and popular tech stocks including Nvidia and Microsoft, collectively dropped almost a trillion dollars in market value, a record dollar amount for that timeframe. The dollar decline is that high because those companies have grown so much lately and even a relatively benign percentage drop comes off a larger number, but it’s still a noteworthy chunk of money.

Beyond news like that, consternation has been growing for some investors as we get deeper into election year politics and questions about the Fed and potential ulterior motives for its rate decisions get thrown into the mix. The Fed itself, as explained numerous times by none other than its chairperson, Jerome Powell, is an apolitical organization. They have two jobs given to them by Congress – keep inflation manageable and foster a strong labor market. Dabbling in politics isn’t their third responsibility. This has been reiterated countless times over the years but questions still remain.

Does the Fed play politics? Do they raise rates to punish or reduce rates to play favor? Do voting members of the Fed’s rate-setting committee put their collective thumb on the scale for specific candidates, political parties, or their personal agendas?

These are valid questions but, as with the politicization of seemingly everything these days, answers seem open to wide interpretation. For the Fed it’s absolutely a case that anything they do, even doing nothing at all, will be second-guessed and derided by many. So instead of getting overly political, which is something I wholeheartedly try to avoid in these posts, let’s look at some data and analysis on this topic compiled by my research partners at Bespoke Investment Group.

From Bespoke…

In looking at Fed policy actions since 1994 during election and nonelection years, on a net basis, the Fed was more likely than normal in an election year to keep rates on hold, less likely to hike, and more likely to cut rates.

The only election year that the Federal Reserve cut rates in the period from May through November was in October 2008 when the financial system was on the brink of collapse and neither candidate was an incumbent.

It’s hard to imagine any aspect of society as not having a political view these days, especially in Washington DC. If there’s one institution that has mostly managed to stay out of the political fray, though, it’s the Federal Reserve. Individual members have their political biases and some former members even find their way to serve in the administration of the President, but in formal communications and in their official capacities, they tend to stay out of politics.

With 2024 being a Presidential election year, the subject of rate cuts and their timing takes on an added political twist. If the FOMC cuts rates too close to the election, they could be seen as trying to put their hands on the scale in favor of the incumbent while a rate cut right after the election could be seen as rewarding the winner and trying to give them a ‘head start’. Currently, some Democrats have already expressed concern that keeping rates too high for too long has hurt the economy and threatened President Biden’s re-election. Supporters of former President Trump argue instead that by just talking about and telegraphing rate cuts, the Fed is goosing the economy to get President Biden re-elected. Being Fed Chair sounds like fun, doesn’t it?

There are plenty of examples in the past of different administrations either jawboning or blaming the Federal Reserve for certain outcomes. In 1998, former President George H.W, Bush said in an interview that Fed Chair Greenspan’s reluctance to more forcefully lower rates during the recession of 1990-1991 resulted in the weak recovery that cost him re-election. Bush recalled “I reappointed him, and he disappointed me.”

There are always going to be stories and anecdotes to suggest whether the Fed plays politics, but the best way to look at it is through the data itself. Going back to 1994 when the Federal Reserve started announcing its rate decisions in real-time, we compared their actions (at scheduled and unscheduled meetings) in Presidential election years versus non-election years to see if there were any differences or similarities. All else equal, you would expect to see the frequency of rate hikes and cuts be the same in election and nonelection years.

The first chart below compares the frequency that the FOMC has held, hiked, and cut rates during Presidential election and non-election years. In years when there was a Presidential election, the Fed held rates unchanged at 71.2% of its meetings, hiked rates 15.3% of the time, and cut rates 13.6% of the time. While the differences were small, on a net basis, the Fed was more likely than normal to keep rates on hold, less likely to hike, and more likely to cut rates. The Fed may be independent, but historically there has been a slight bias of moving towards easier than tighter policy during an election year.

Looking more specifically, the chart below compares policy actions in May through November in election and non-election years. Here there is an even wider disparity with a bias towards sitting on their hands. At the 22 meetings during these months of Presidential election years since 1994, the Fed stayed on hold just over 80% of the time, hiked rates 16.1%, and only cut rates once (3.2%). Based on these prior actions, as the election gets closer, the Fed looks like it has historically attempted to avoid cutting rates at all costs.

The table below shows the different times that the Fed cut and hiked rates during election years since 1994. Of the eight different rate cuts, only one occurred in the months spanning May through September, and that was a 100- bps cut on 10/29/08 when the financial system was on the brink of collapse. Not only that, but it was also an election where neither candidate was the incumbent, so politics played zero role in that example.

With regards to rate hikes during election years, five of the nine hikes occurred in 2004 when George W. Bush was running for re-election (an election he ultimately won). Besides the hikes leading up to and just after Bush II’s election in 2004, the other three hikes that occurred during election years were when neither candidate for election was an incumbent. Again, outside of that one period in 2004, the Fed appears like it prefers to stay put during election years, and as the pages of the calendar turn, it raises the question, will the rate cuts that keep getting pushed further out on the horizon ever arrive?

Have questions? Ask us. We can help.