Market Commentary: Bank Troubles

Kris Venezia, Market Analyst

Banking crisis is never a fun phrase to bring up, but there have been some concerns recently with parts of the banking system.

It started with Silicon Valley Bank. They had a bank run which means people were going to the bank pulling funds, and eventually, SVB could no longer meet the withdrawal requests.

Signature Bank was then shut down by regulators. The bank had become popular with crypto firms.

And then, in Europe, Credit Suisse was forced to sell themselves to UBS at a discount.

Each of the banks above had specific risks that don't necessarily apply to all banks. Silicon Valley Bank and Signature Bank were lending to a specific group of clients which allowed the bank run to happen very quickly. Credit Suisse had made some poor decisions over the last several years, and there had already been a lack of confidence with that bank.

However, there is a larger concern that the bank problems spread. There are reports that people are withdrawing funds from small and mid-sized banks. Even if those banks are in okay shape, if a bank run is large enough, it will put those financial institutions at risk.

The final issue is a lot of the assets banks hold have lost value in the last one or two years. With their asset values down, it adds to risks when major withdraws happen.

Regulators have stepped in quickly and in a huge way. The thinking is they will be able to contain the problems to the banks listed above, but we'll have to see

Daryl Eckman, President

This is something that has happened in the past. Right now, it does not appear like something that will continue to develop and spread, although it would not completely shock me if there was a little more spread.

If you look at Silicon Valley Bank, you can see some of the mistakes they made. They were lending to a very specific group of people.

We don't feel like it's a major concern right now. The portfolios mainly hold U.S. Treasuries when it comes to fixed income. The Treasuries are backed by the U.S. government. If you are concerned about your portfolio, you can check your statements.

We have received phone calls, I've even been stopped in casual conversation about it.

There was a time in the past when the government did have to step up and back stop parts of the banking system. The FDIC had to ask Congress for more funding to backstop deposits.

Like I said earlier, at this point, the banking crisis is confined to very specific institutions. We don't see any concerns for clients currently.

Clint Carpenter

Preparing For 2023: Market Commentary

Clint Carpenter, Director of Operations

I think part of what makes a market correction or bear market so uncomfortable, when you’re in it, is just not knowing how long it will last.

This one in particular, which started last year, might feel to some people like it’s lasted forever. It can get difficult to remember even 2 years ago when markets were up double-digits.

As we’ve said before, we look to turn these times into opportunities. We can’t say how long this market volatility will last because no one can, but in the meantime, maybe some quick historical data might help some feel a little better.

If we look at the last hundred or so years of S&P 500 returns for instances of when the market has posted a double-digit loss for the year, we come up with 9 examples. Some recent ones are 2008 of course, and 2002, but we can look all the way back to 1937. So, in 7 of these 9 times that the market fell double digits, the market has finished substantially higher the following year.

Just one quick example of that, in 2008, the S&P 500 finished the year with a return of negative 37%. 2009, it was up 26.5%. Back in 2002 the market posted a loss of nearly 22%, but was up nearly 29% the following year. We’ll post a chart that shows you all of these examples but I thought I’d add this for that historical perspective.

Kris Venezia, Market Analyst

There's a lot going on, but I'm going to focus on consumer spending in the U.S.

We've gotten some reporting out on consumer spending. It's been fascinating how spending has shifted since early 2020.

To quickly recap, we had 2020 and 2021 as years where people spent money in specific areas. Tech spending was popular, so think new laptops, new earbuds, new televisions, new tablets. You had spending on furnishing and renovating homes. Furniture, appliances, a new grill, toys for the backyard. There was a tremendous amount of spending on online shopping. Etsy, eBay, Amazon, etc.

You get to 2022, and that changed in a huge way. Consumer spending has gone from buying things to buying experiences.

People are flying, people are going to casinos, people are going out to eat, people are booking cruises. And it's not just that people are spending money on these experiences, but they're spending more than they ever have. It's not just that these things have gotten more expensive. People are buying airline tickets more and when people go out to eat, they're buying more stuff. Maybe the bottle of wine instead of a glass.

The spending trends continued through the end of 2022. There were some expectations that spending would normalize, and people would shift to buying more things around the holidays.

Data we've seen so far shows that didn't happen. The U.S. Census Bureau had a December retail sales report that showed slower consumer spending on things across the board.

We can compare that to airlines who've announced in early January that bookings are stronger than ever for the first several months of 2023.

If you see a story that says holiday spending was up "x", I would check the source. Retail groups are going to push funky data because it's in their interest. They can say more dollars were spent in 2022 than 2021. And that's true because things cost more in December 2022 than December 2021.

I'll finish by saying the consumer and the employment picture are the two areas of the economy to pay attention to over the next 6 months. Do we see consumer spending normalize? Do we see it soften with the inflation we've seen over the last 12-plus months? Do people spend less and that spurs layoffs? Do layoffs happen and that softens spending? Do people continue staying employed and continue spending like they have been?

Those are all questions on the radar to kick off 2023.

Daryl Eckman, President

I want to review what has happened.

We did move about a year, year plus ago, moving out of the long term bonds.

We didn't like the rates of bonds in 2021 and 2022 and there was risk in staying in those longer term bonds.

Bonds values go down when interest rates go up, so the timing was good. We saw 2022 was a tough year for bonds.

Interest rates moved up in 2022, and not only did they rise, but they went up a good amount through last year.

We have been nibbling into one and two year Treasuries. The rates there have been solid. We are now extending out our bond maturities up to 5 years and beyond.

We will be having some of those conversations with you where appropriate.

We feel the Federal Reserve is getting closer to ending their tightening. That could change, but that's where we feel on bonds.

On the economy, the big debate is what happens over the next several months. There's a conversation of hard landing versus soft landing. If there's a recession, how severe will it be. Some people think there will be no recession.

I have been on the more pessimistic side of the recession talk.

We have been paying attention to the real estate market for clues towards recession.

We have been seeing some softness in this sector, the real estate sector.

I think the real estate market and how the Federal Reserve navigates challenges will be big parts of 2023.

We have been doing some nibbling in the portfolios on stocks. Very little nibbling, but trying to take advantage when we can.

We want to be patient and measured and not make any drastic moves on the stock side.

Clint Carpenter

Finally, two quick things to be aware of in the new year when it comes to new tax rules… One of the last bills congress signed last year has changed the beginning age for required minimum distributions starting in 2023, that new age is now 73. That’s the age that people must start taking distributions from tax-deferred IRAs.

Those of you still contributing to those IRAs, your IRA contribution limits are increasing by $500 in 2023- you can now make a contribution of $6,500, or $7,500 if you’re over the age of 50.

Midterm Elections: Market Commentary

Clint Carpenter, Director of Operations

Before getting into some data on midterm elections and their impact on stock markets, I begin with a caveat, of course. Past market performance and trends do not dictate what we do with investment portfolios, but they can sometimes provide some keen insights and if anything, as I’ll share in a moment, it can be a bit of good news in an otherwise turbulent time.

So when we look back through decades of stock market history, we see some pretty surprising consistency when it comes to midterm elections. If we break things down and look at the past in terms of presidential cycles, meaning just looking at each 4-year period of time a president is in power, we see that the midterm year is almost always the worst year in that 4-year cycle in terms of stock market performance.

We can also see that the S&P 500 has historically underperformed in the year leading up to the midterm election. The average annual return during the 12 month period prior to the election is only .3%, significantly lower than the historical average of any given year which is more like 8%.

So what happens after the election? The post-midterm period is a totally different story. The S&P 500 usually outperforms in the 12 month period after the midterm, with an average return of over 16%.

Narrowing in on that even a little bit more…

We can also see that in 17 of the last 19 midterm elections, stocks have performed better in the six-months after the election than they did in the six months prior to the election. All of this data is regardless of which party wins, by the way.

I know this can be a little difficult to follow, so we’ll be sure to post some charts on our website to help illustrate this. But basically, the bottom line is that we see a trend which shows that the year of the midterm election is almost always volatile, and the year after the election is almost always a positive return for the markets.

I’ll also add.. At any given time we have a lot of information that we’re taking in and synthesizing and using to take action in portfolios. This kind of historical election data is just one small piece of the equation, and by no means dictates solely what we do with investments.

Daryl Eckman, President

I'm going to talk more of a historical perspective.

Before I do that, I want to talk about the last year, year-and-a-half.

We made some decisions in the last year to sell some of our bond positions. We had some concerns as we went into early this year to sell some of those longer term bonds.

Some of that was skill, but we were also a little lucky to shift out of longer term bonds when we did.

As you have probably noticed, we also took some money away from the stock side. We were a little concerned early in the year with equities as some issues came up.

Inflation was not being talked about in 2021. Now, in 2022, we're seeing inflation be a big buzzword, so things have changed a lot.

We're managing the bulk of the portfolios conservatively. We're seeing a slowdown in the housing market with higher rates. Mortgage demand has come down.

Real estate is a big part of the market, and we are watching it closely to see how it will impact the broader U.S. economy.

Let's talk a little about volatility with the election.

The party in power makes a difference on how people feel about things. Republicans are more confident in the economy when Republicans have more power, and vice versa when Democrats are in power.

Whether it's Democrats or Republicans in charge, historical trends show market performance is similar with each party.

Stocks have gone up under both Democrats and Republicans.

Shifting to the future, we are going to ease into stocks with the market down. It will be slow and measured, but we want to very slowly get the cash on the sidelines to work.

Patience is so important, and we have been stressing patience during this market downturn.

There are numerous risks facing the economy, but those risks do create opportunities if we are patient.

Kris Venezia, Market Analyst

Shifting gears a little...

There's a strange split happening in the U.S. economy right now.

We're starting to see parts of the economy that are hurting. Rates have gone up a lot in a short amount of time, and it is having an impact on certain industries.

Job reports are starting to show job losses in the real estate and financial services sectors which makes sense. There's less demand for loans when rates go up because it prices people out of the new home or new car or other larger ticket items on financing.

Recently, we've seen signs of significant cooling in construction and manufacturing parts of the U.S. There are some early signs of job losses in those sectors as well.

While that weakness exists in certain sectors, other parts of the U.S. economy are booming. The services parts of the economy, like restaurants or hotels or entertainment industries, are doing terrific. We're seeing substantial job gains and job openings in those areas.

Caesars reported their best quarter for Las Vegas ever. They said visitors blew by expectations and spending was incredibly robust. Royal Caribbean reported record breaking bookings in the last week for a new cruise line. Airlines continue to have more demand than they can fulfill, even with air fares ridiculously high.

The biggest issue we're seeing from the services sector is they cannot keep up with demand. It's been difficult for them to fill open positions for waiters or hotel lobby employees.

The great divide between certain sectors in the U.S. is making it very difficult for policy makers. Inflation is too high, and the goal is to bring that down. But, if policy makers continue to tighten financial conditions, it poses major risks for real estate, financial services, and manufacturing sectors. If they do too little, the risk is that painful inflation continues.

The strangeness in this economy also makes it challenging for us as investors. It's hard to get a good read on what's ahead when Caesars announces record breaking Vegas numbers at the same time as Wells Fargo is planning layoffs in its mortgages department.