Investors often experience election year jitters, especially when it is a Presidential election year. Strong political feelings can cloud otherwise rational judgment on long-term investment strategies. We often say that the market does not like uncertainty, and there is plenty of uncertainty in closely contested presidential elections.

Every four years, optimistic sloganeering vies with fearful predictions as each side seeks to get a leg up with voters. Looking over the last 100 years, from Herbert Hoover’s underwhelming “Who but Hoover?” and Franklin Roosevelt’s more optimistic and tuneful “Happy Days are Here Again”, campaigns have tried to convince the public of their candidate’s successful plans for the country and the economy.

The good news for investors is it doesn’t really matter which party’s candidate is elected president. Stocks have risen dramatically over the long term under both Republican and Democratic administrations. True, there have been sharp, painful selloffs, most notably during the Great Depression under Hoover and the Great Recession under George W. Bush, but over the course of time, markets have produced tremendous returns as the following chart shows (all charts are from BlackRock):

The U.S. economy is huge and hard to predict. Unless it is in response to a major financial crisis when everyone agrees to act together, it is difficult to pass and enact legislation that would have a material economic impact. Companies attempt to grow and maximize shareholder value no matter who is in office, so it pays to separate your political beliefs from your investment planning.

Let’s look at how much of that cumulative return you would have given up if you only invested when your preferred party was in power. The 1,456,754% return shown in the above chart is a little hard to wrap one’s head around so we’ll concentrate on dollar amounts over different time periods. The following chart shows what would have happened if you only invested when your party was in office compared to whether you remained apolitical and stayed invested. Starting with $100,000 in 2013, those who only invested when a Republican was president would have seen their portfolio rise to $181,000, while those investing only when a Democrat was president would have $172,000. Those who stayed invested no matter which party was in power would have seen their portfolios soar to $311,000. The numbers are even more impressive when looking at the last 70 years. Over that period, Democrats who invested $1,000 would have earned marginally more than Republicans, but investors who stayed in the market the entire time would have earned $1.5 million more than either of them.

During election years when uncertainty is at its highest, it also pays to stay invested rather than sit on the sidelines until the results of the election are known. The chart below shows that, going back to 1926, Presidential election years have seen better than average returns in the stock market. Stocks have performed best during years when there is no Presidential or midterm election (up 14.8% on average), but Presidential election years have also produced attractive returns (11.6%).

Looking even further at results by quarter, the greatest returns in Presidential election years have happened in the third quarter with stocks rising 6.2% on average during the July to September time period. This is, of course, before the election in November, so if you waited until after the election to get back into the market, you would have missed most of the gains for the year.

Separating political views from investments is the smart thing to do to achieve your financial goals. Regardless of your political affiliation, history shows that it’s best to be an Independent when it comes to long-term investing success.

Tracey A. Baker, CFP®, Brian T. Jones, CFP®, Kevin E. Donovan, CFA and, Parker G. Trasborg, CFP® discuss markets in 2023 and what we are looking towards in 2024.

Parker G. Trasborg:

Hi, my name is Parker Trasborg. I’m Senior Financial Advisor here with CJM Wealth Advisers, and today as always, I’ve got Kevin Donovan, our Portfolio Research Director and two special guests. We’ve got our President and another Adviser here, Tracey Baker and our Chairman and another Adviser, Brian Jones. Happy New Year everyone. Thank you for joining us and tuning into our first quarter update of 2024. So 2023 was a great year for stocks. The bonds ended up doing pretty decently as well. Brian in 60 seconds or less, what was your top story of last year in 2023?

Brian T. Jones:

Thanks, Parker. I think the big story for me was the absolutely monster rally we saw in Q4. Clients have to remember that when we sent out the 9/30 reports, the Bond Agg was negative at that particular point in time. And if you look at the Dow, it was only up just barely over zero at that point. And what ended up happening was October was a down month. Both stocks and bonds declined in the month of October, and then we got to November and both equity and bond markets just absolutely took off, and it was just a wonderful end of the year. You saw a lot of broadening in the markets with regards to a lot of the things that had lagged front half of the year. So we ended 2023 it was just a great year.

Parker G. Trasborg:

Thank you. So fourth quarter was pretty good. Kevin, what did the rest of the year look like for you?

Kevin E. Donovan:

Yeah, let me expand it a little bit on what the full year was like. Let’s throw a chart up and see what the market bill performance looks like. You can see those, the top line there is the S&P 500, and it was up 24% for the year. Now we’ve talked in previous videos and our marketing commentaries about how the S&P was really influenced by the magnificent seven tech stocks like Nvidia, Apple, Amazon, things that really benefited from the AI boom earlier in the year. And that kind of carried through to the outperformance of the S&P for the full year. We go a little further down the chart. You can see international stocks had a very good year up 15% for the year. They beat the Dow. And bonds ended up with a gain of about five and a half percent, not too bad for bonds.

Showing the next chart is the fourth quarter chart that Brian was talking about. And here you can really see some of the things that he was mentioning where the Dow led all indexes higher, that was up 12.5%. So that’s some of the broadening out of the market where other sectors besides technology did well, like Brian said. And you see the big increase in bonds during the quarter that were negative, but they went up almost 7% in the quarter.

And one of the main reasons for that is our next chart, which shows the 10-year yield for treasury bonds, and it was a very volatile year for the 10-year yield as the Fed increased interest rates in the first part of the year, then held them steady, and then right at the peak there, as you see towards the end of the year in late October is when the Fed had said that basically they were done raising rates for now and that they may actually cut rates. They see themselves cutting rates in 2024, and that’s when we saw the 10-year yield go down steeply and you saw bond prices rise dramatically and the stock market really take off. So that’s kind of the big story for the year is the yields. Fed raising interest rates didn’t declare victory against the war against inflation, but inflation came down dramatically to about 4% and it’s well on its way towards going down even further.

Parker G. Trasborg:

Yeah, hopefully we’ll hit our 2% target (on inflation) here and not too long. So 2023 again was a good year, volatile as we kind of made our way through the year. Tracey, what are your top stories? What are you thinking about for 2024?

Tracey A. Baker:

Yeah, 2024, we’re really hoping that it is going to continue that trend that we started kind of late October, November, December that the Fed waged war on inflation and they are going to continue the trend of no longer raising interest rates. Anybody that has been in my meetings, I’ve talked about rising inflation and the Fed trying to fight it with raising interest rates. They declare victory and they’re going to maybe even perhaps drop interest rates, which would be fabulous. I warned clients we didn’t really want to see them pull back on interest rates because for them to do that would mean that they saw weakness in the economy.

It may be that they just saw that the economy has survived this and that they had that soft landing that they were hoping for, and that would be good news for everybody. So we’re really hopeful for that. We’ve got an election year, which I know we’re all dreading our phone ringing off the hook, but we really think that’s going to be kind of a non-issue. So we’re really hopeful that 2024 is going to be a good year for all of us other than our phones ringing off the hook, and we’re going to have a good year in the markets, both in the stock and bond markets. So we’re really very hopeful for 2024.

Parker G. Trasborg:

Yeah, it does look like the Fed may have engineered us to the soft landing.

Tracey A. Baker:

Hope so.

Parker G. Trasborg:

Keep our fingers crossed. Kevin, do you have anything to add for the rest of this year?

Kevin E. Donovan:

Yeah, I want to just echo what Tracey said about bonds. Right now, bonds are paying good yield, good income on bonds right now. You remember from ’08 until 2022, bonds were at zero basically. Now we’re finally getting good income, and if the Fed does lower interest rates, we’re going to see price appreciation on those bonds. So we’re really optimistic about the bond market. Stocks always going to be volatile, much more volatile than bonds are. I would caution against the market consensus at the beginning of the year. You remember the last year our market consensus was we were going to be in a recession in 2023. What everyone is saying is going to happen now may not necessarily pan out. We don’t know. There could be a market surprise, but we are optimistic on the bond side and we’re optimistic long term.

Parker G. Trasborg:

Great. Great. Thank you. Thank you all for joining us. Try something new today. Thank you, Brian for having us here and Tracey for joining as well. Kevin, as always, it’s been a pleasure getting together with you. Again, Happy New Year to everyone. I hope you all have a healthy and happy 2024. And if you have any questions at all, feel free to reach out to your planner directly and we will see you next time. Thank you.

For those still actively working full time, funding your employer retirement plan every year is the foundation of any long-term plan to retire from the workforce. Setting aside dollars today into a tax deferred account (401(k), 403(b), TSP, etc.) helps to grow one’s nest egg for tomorrow when you are no longer working full time. Clients frequently ask how they could save more into these plans, since there are limits, and one great solution is the ‘Mega’ Back Door Roth.

Let’s take a step back and review how this works. All retirement plans have a maximum annual contribution amount. In 2023, the maximum annual employee contribution to 401(k)s, 403(b)s, and the TSP is $22,500.  If you are over 50, there is an additional “Catch-up” contribution of $7,500.  The IRS has announced the 2024 contribution limit will increase to $23,000, but the catch-up contribution will remain at $7,500.

There is another number to be aware of in 2023 — the maximum that can be contributed to a 401(k) plan by both the employee and employer is $66,000 (or $73,500 if you are at least 50 years old).

       Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401(k)-and-profit-sharing-plan-contribution-limits

So, if you are a high income earner and have maxed out your annual employee contribution ($22,500/ $30,000 in 2023), what should you do next?

Enter the “Mega” Back Door Roth.

The “Mega” Back Door Roth allows you to contribute above and beyond the $22,500/$30,000 to your employer retirement plan.

In order for this strategy to work, you must meet certain criteria:

1. Have earned income to contribute and enough disposable income to make after-tax contributions
2. Your employer plan allows you to make those after-tax contributions
3. The plan must allow periodic in-service distributions or Roth conversions of your after-tax money and any earnings

Roth accounts are a better “deal” for taxpayers in retirement compared to a traditional account for a few reasons. Traditional accounts require an annual distribution beginning at age 73 (age 75 beginning in 2033). This distribution is taxed at ordinary income tax rates, whereas Roth distributions are federal tax free.

Let’s look at how this strategy has worked for our clients using the case studies below.

Case study

Client (age 42) works for a large IT company. The company 401(k) plan allows after-tax contributions and periodic in-plan Roth conversions. In 2023, she contributes $22,500 as her base employee contribution to her company’s 401(k) plan. Her company matches 5% of her $400,000 annual salary to the plan totaling $20,000.

Employee pre-tax contribution   $22,500

Employer contribution                    $20,000

Total 2023 contribution                  $42,500

On top of the contributions above, she contributes an additional $23,500 in after-tax contributions to the 401(k) plan to reach the maximum of $66,000. She immediately does an in-plan Roth conversion of these dollars (if done immediately, there should be no additional income tax liability on the $23,500 as there won’t be any earnings).  These dollars are now in a Roth 401(k) meaning that they will grow tax deferred and distributions in retirement will be federal tax free.

As you can see from the example above, this employee is making maximum use of their employer retirement plan by a) maxing out their annual employee contributions b) maxing out the employer annual matching contribution and c) deferring additional after-tax contributions inside her 401(k) plan and immediately converting these additional contributions to Roth for retirement.

Age 50+ case study

In the example above if the client were age 50 (instead of 42) her contributions would look like this in 2023:

Employee pre-tax contribution                                  $22,500

Employee age 50+ “Catch-up contribution”            $7,500

Employer contribution                                                $20,000

Total 2023 contribution                                                $50,000

In this example, the employee would also make an after-tax contribution of $23,500 (after which the employee does an in-plan conversion of the after-tax dollars to a Roth 401(k) as the IRS allows up to $73,500 including the age 50+ catch-up.

Whew. The tax code, qualified retirement savings rules plus upcoming changes as part of the SECURE 2.0 Act make this quite a complicated tax strategy. But leveraging after-tax contributions inside your employer retirement plan has significant benefits over the long term if done properly.

Note that everyone’s situation and plan is different. You should work with your planner and tax preparer to implement the strategies above.  If you have questions about maximizing your retirement savings or any additional options available to you to make more of your hard earned dollars tax-free in retirement, please contact us today.

Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss markets for the third quarter 2023.

Parker G. Trasborg:

Hi, I’m Parker Trasborg, Senior Financial Adviser with CJM Wealth Advisers, and today again we’ve got Kevin Donovan, our Portfolio Research Director, for our October 2023 market update. Kevin, markets started the third quarter okay, and then sold off starting late August into September. What happened?

Kevin E. Donovan:

Yeah, it was a disappointing last two months of the quarter there in August and September. Basically, it was all again, once again driven by expectations about the Fed and the market’s rethinking about what it expected the Fed to do in terms of will it raise interest rates or keep them high? Or when they’re going to eventually stop raising interest rates and lower them. So, let’s look at the first chart here, and this shows the 10-year yield on the treasury bond.

Now, a lot of things feed into the 10-year yield, and I want to focus on a few things, though, for this quarter. One is that inflation was down significantly from last year, but lately it’s come in just slightly above what the market expected. When you combine that with economic growth being a little better than expected, that caused yields to rise, because the thinking of the market is this may give the Fed room to increase rates even more as they continue to fight inflation. So, the inflation remains above the Fed’s target of 2%. And you can see here at the beginning of the quarter, the 10-year yield was at about 3.8% and ended at about 4.6%. It trended higher in August and then it really took off in September. So, that 3.8% to 4.6% increase is actually a 20% increase in the 10-year yield, a fairly significant increase in a short amount of time.

So, the concern is that the battle against inflation isn’t over and that the Fed may have more work to do, and if they do have to do more work and raise more interest rates, that will restrain the economy and may end up to an economic slowdown. So, if you look at the major market indexes and how they performed in the third quarter, which is pretty much opposite of the 10-year yield. We already saw the yield trending higher in August. We can see the indexes trending lower in that month, and when the yields finally took off pretty strongly in September, we can see that the market’s sold off pretty sharply in the last two weeks or so of September. So, what we ended up with were losses across the board.

The Dow was down about 2.6%. The S&P 500 was down about 3.7, and international stocks were down about 4.7, as the dollars strengthened. Bonds were down about 3.2%. Bond prices fall as yields rise, so everything ended up in the negative column. What we did see, though, was growth stocks and value stocks perform about equally in the third quarter.

If we shift to the next slide on the year-to-date performance with indexes, you can see that the S&P 500 year-to-date is still up a significant or a healthy amount, 11.7%. Now, that is helped a lot by the strength in some of the very large tech companies earlier in the year. With the AI boom, those companies took off, but for the rest of the market, we haven’t really seen that kind of an increase. And you can see the Dow is only up 1.1% this year, so it’s fairly positive this year. International stocks are doing okay, made single digits, about 4.5%, and bonds are down about 1.2%. So, not a great quarter by any stretch to the imagination, but year-to-date for the equity markets, we’re still positive, and bonds are slightly low.

Parker G. Trasborg:

Thank you. Tough quarter. Heading into the year, everyone was expecting a recession to happen. Here we are now in October and we haven’t seen that so far. What’s the thinking around that at this point, Kevin?

Kevin E. Donovan:

Yeah, well, market expectations have been wrong about yields, they’ve been wrong about the recession. So, the economy is stronger than expected. We don’t expect a recession in the rest of this year. There’s only one quarter left. There are still big banks out there who are calling for, they see a recession next year. Others were saying “We’re going to see a soft landing, we just don’t know.” Right now, it hinges upon inflation and if we do see an uptick in inflation, how aggressive the Fed may be in responding to that. If they push yields too high, will that cause the economy to contract by too much? It’s up in the air right now.

Parker G. Trasborg:

Thanks. Well, again, that’s all the time for today. We’ll continue to keep an eye on and monitor the situation as things are progressing on a day-to-day basis, depending on what data has been coming out. Thank you for joining us, Kevin, and we will see you next time for our end of year update in January next year. Bye-bye.

Required Minimum Distribution rules used to be simple enough that clients knew when they were subject to the rule. Confusion around Required Minimum Distribution (RMD) rules started in 2019 with the passing of the Secure Act. Additional changes over the past four years have prompted many questions from clients. In this article, we’ll summarize the current rules, what is different for 2023, and what you should do if you have questions.

Current Required Minimum Distribution Rules

• Traditional IRA RMDs must be met as outlined in the below chart

• Inherited IRA RMD rules have not changed for IRAs inherited prior to 2020.
  • Prior to the SECURE Act, beneficiaries of Inherited IRAs had the option to “stretch” the distributions over their own life expectancy, allowing for potentially smaller annual distributions and longer tax-deferred growth.
• IRAs inherited in 2020 or later, most beneficiaries must fully distribute the account within 10 years. In addition:
  • If the original IRA owner was taking RMDs during their lifetime, an annual RMD may be required. However, this requirement is currently waived through 2023.
  • If the original IRA owner had yet to begin taking RMDs, annual RMDs are not required.

So how did we get here? Prior to the passing of the SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old. The Secure Act changed the RMD rules for anyone other than a spouse who inherited an IRA in 2020 or later. The major change requires non-spouses to take all money out of the Inherited IRA within 10 years. My partner, David Greene, put together a great summary article of the SECURE Act.

The Secure Act 2.0 clarified a few points and materially changed the RMD age to 73 starting in 2023, then back further to age 75 beginning in 2033. My colleagues, Brian Jones and Parker Trasborg, wrote an article highlighting the changes.

The IRS ultimately waived the new inherited RMD requirement for 2021 and 2022. They also issued guidance that annual RMDs may be due going forward and vowed to clarify the rule. In June of this year, the IRS issued additional guidance that further waived inherited RMDs for 2023 and noted that final guidance should be expected in 2024. Beneficiaries who inherited their IRAs in 2020 and after may be required to take their first annual RMD in 2024. In 2024, anyone subject to an annual RMD would need to take that distribution or face a tax penalty of 25%. Of course, we’ll continue to monitor the situation in case the IRS decides to change its mind again.

For some clients, it makes sense to take an Inherited IRA distribution this year even though there is no requirement. The 10-year rule still applies, so it’s important to work with your accountant and financial planner to plan for the long-term tax bill that could be associated with the distributions.

With the frequent changes to the RMD rules, our clients have had a lot of questions about their RMDs. At CJM, we handle RMDs for all our managed clients to alleviate the stress of having to keep up with these ever-changing rules. If you still have questions or are uncertain whether you are subject to an annual RMD, please don’t hesitate to reach out; we’d be happy to have a conversation.

A noticeable feature of the stock market this year has been the big difference in the performance of the two major stock indexes. Through September 14, 2023 the S&P 500 has raced ahead with a gain of 17%, while the Dow Jones Industrial Average trails far behind with a gain of only 5%. The S&P is well ahead of most major international equity and bond indexes as well.

The S&P is more heavily weighted toward the big technology-related stocks (Apple, NVIDIA, Google, Amazon) that have outperformed this year with the emergence of artificial intelligence as a major theme, but there have been industry-changing developments throughout the market’s history. It’s worth taking a look at the past history of the two indexes to see if this level of outperformance is sustainable.

This year’s 12-percentage point outperformance by the S&P over the Dow is historically wide. Looking back to 1990, the biggest gap in performance for a full year was in 1998 when the S&P jumped 27% during the early dot-com days while the Dow rose 16%, a gap of 11 percentage points. What happened after that is a good argument against chasing returns. The Dow beat the S&P in each of the next four years (one positive year and three negative) as the dot-com boom turned to bust, 9/11 happened and the U.S. suffered through a recession. The Dow lost 9% from 1999 through 2022, while the S&P plunged 28%.

Looking at each year from 1990 through 2022, a remarkably equal record of performance reveals itself. Over those 23 years, the S&P beat the Dow in 16 years, while the Dow came out on top in 15 years. Two years were a virtual tie between the two. This chart illustrates how close the performance of the two indexes have been from 1990 through now.

The performance of the indexes since 1990 has been virtually identical with both gaining 1,170%. This is astonishing. There is a slight difference due to rounding, so if you invested $100,000 in the S&P at the start of 1990 you would have $1,275,000 today, while your friend who invested the same amount in the Dow would have $1,268,000. You could boast that you’re $7,000 richer after more than 33 years, but you would never be that petty.

You don’t have to go back 30 years to see how time affects returns. Just going back to the beginning of last year shows a dramatically different picture of the recent returns of the S&P and the Dow. Although the S&P is way ahead this year, it trailed the Dow significantly in 2022 when it dropped 19% compared with a 9% decline in the Dow. When you look at the performance of the two indexes since the start of 2022, a different picture emerges.

The Dow is actually ahead of the S&P with a loss of about 4% compared with a 5.5% decline in the S&P since the start of last year. This shows how merely changing the start date when looking at performance can change the numbers entirely. It also illustrates the importance of limiting losses when the market declines, because you don’t have to outperform on the upside to come out ahead.

Fear of missing out during a year when the market is rising is natural, but investing happens over a long period of time. The year-by-year fluctuation of the market means that what works one year may not work the next and you’re not going to get it exactly right every time. None of us felt good last year when everything was negative, but limiting the loss in a down year helps you come out ahead even if you aren’t 100% invested in the best performing asset class when markets are rising. Whether you picked the S&P 500 or the Dow over the past 3-plus decades hasn’t been important. Staying invested is what puts you ahead in the long run.

Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss markets in the second quarter of 2023.

Parker G. Trasborg:

Hi, I’m Parker Trasborg Senior Financial Adviser with CJM Wealth Advisers. And today again I’ve got Kevin Donovan, our Portfolio Research Director for our quarterly update of July 2023. Kevin, first quarter was great for markets all around. What did we see in the second quarter?

Kevin E. Donovan:

Well, if we’re looking at the S&P 500, I mean it’s pretty much a repeat of the first quarter. You might as well play back the video from that quarter. The good thing is we didn’t have any major negative issues come up or any crises like the banking crisis in the first quarter when the mid-tier banks, several of them failed. We didn’t have anything like that in the second quarter. But in the second quarter for technology stocks, they had another leg up because artificial intelligence really boosted up some of the companies, the larger companies in the sector, and that really helps out the S&P 500. So once again, the tech sector led the S&P 500 to a wide performance gap over the other indexes. And we can see that if we look at the first chart here, which is the first quarter performance chart for the major indexes.

So you can see right at the top in dark blue is the S&P 500, and that was up just over 8%. And then well below that, the Dow Jones Industrial Average in orange and the International Index in light blue, they stayed pretty much right around zero until June when they finally started to turn positive and they had a really good last week of the quarter. So the Dow finished up about three and a half, and international stocks almost 2%. So still well below the S&P 500, but a positive performance for the quarter.

Parker G. Trasborg:

Great. And what happened with bonds?

Kevin E. Donovan:

Yeah, bonds also hovered around 0% until June, but they turned negative towards the end of the quarter and the Fed announced that it would pause its interest rate hikes in June. But they said very strongly that they were going to go back to hiking interest rates later on in the year. So at least two more times. And I think leading up to that point, the market maybe had doubted the Fed’s resolve in continuing their interest rate hikes. And a lot of bets were made that the Fed eventually had to cut interest rates because economy would slow down too much, that the very aggressive interest rate hike cycle would slow the economy down. But the economy has shown to be surprisingly resilient so far, and now the market’s starting to believe that the Fed may have to raise interest rates and that has a negative effect on bond prices.

If we switch over to the year to date chart, you can see it’s a similar story. S&P has a big lead. It’s up almost 16% in the first half of the year. That’s really good Performance numbers. International is up about 10%, so pretty good performance there. They had a very strong first quarter that they built on, and the Dow was up just 3.8% while bonds are up 2%. So why is this a big discrepancy between the S&P 500 and the Dow? Well, the technology stocks which we talked about is one major reason, but the stock market is divided up into 11 industry sectors, and four of those sectors are negative year to date still, even with these performance numbers that are positive for the overall indexes. So utilities, energy, healthcare, financial sectors, they’re all negative year to date while the technology sector is up 43% year to date.

So you have these sectors that are weighing down the Dow that are very heavily weighted in the Dow that are keeping it down while the ones that the S&P is overweighted in the technology sector is really lifting it up. So that’s why we’re seeing that big difference in between the Dow performance and the S&P 500 performance. For bonds, 2% gain so far this year, the yield on the 10 Year Treasury Note is right around where we started the year at 3.8%. At the end of the second quarter, it’s a little higher than it was at the beginning of the second quarter, which is why bonds were negative in the second quarter, but still are doing somewhat decently with a 2% gain year to date.

Parker G. Trasborg:

Does that include the interest that we’re clipping off the bonds Kevin, or is that just price appreciation there?

Kevin E. Donovan:

No, that’s total return so far. So it includes the interest and with bond funds paying four to 6% roughly with the 2% gain halfway through the year, you kind of figure that at least you would get the coupon return or the yield return year to date. We’ll see about price appreciation as the year goes on and if the Fed… the economy starts to suffer a little bit and yields start to come down, you may see some additional bond performance, but at least you’re getting that income that you didn’t get prior to this year.

Parker G. Trasborg:

Great. Great. Well, thank you, Kevin. Economy continues to hum along. Hopefully the markets will continue to hum along through the end of the year as well. Definitely a pleasant surprise from what we saw last year through to this year. Thank you all for joining us again today. If you have any specific questions, feel free to reach out to your planner directly and we are happy to get those answered for you and we will see you next time. Bye-bye.

Kevin E. Donovan:

Bye.

CJM hosts Dr. Anirban Basu from Sage Policy Group, presenting Show Me the Money (Supply). Soft landing? Something harder? This presentation will supply in-depth analysis of the major factors shaping economic outcomes, including central bank policymaking, worker attitudes, business confidence, and geopolitics. It will then turn toward a forecast for the year to come, highlighting the major risks that economic stakeholders will likely encounter.

Jessica Ness:

Okay, so we’ll go ahead and get started. As I’ve mentioned, I’m Jessica Ness, owner and senior vice president here at CJM, and we’ve got a great presentation planned for you guys today. I’ll introduce my speaker in a moment, and he will spend about 45 minutes taking us through a presentation. Then we’ll leave a few minutes at the end for Q&A and my colleague Parker Trasborg here. He will be collecting your questions along the way plus anything submitted to us prior. So we’ll try to tackle as many of those as we can. So let’s go ahead and get started. Again, welcome. Thank you for joining us. We appreciate you guys taking time out of your really busy days. I know there’s always lots going on. We value your trust, partnership, just really thank you guys for joining us today. We’re excited to welcome economist, Dr. Anirban Basu from Sage Policy Group.

We saw Dr. Basu most recently at one of our industry conferences, the FPA Conference earlier this year, and he impressed us in his engaging and interesting presentation. As you can imagine, that’s high compliments for economists that we run into. So as our clients know, we believe in education and awareness. To that end, we invited Dr. Basu to speak with us today. Now his presentation will supply in-depth analysis of the major factors shaping economic outcomes, including central bank policymaking, worker attitudes, business confidence, and geopolitical politics. Then it’ll turn to a forecast for the years to come, highlighting the major risks that economic stakeholders will likely encounter.

Now, Dr. Basu himself is a study in contradictions. He’s been called an economist with a personality, which we’ve seen, or alternatively, one with a sense of humor. He has been twice recognized as one of Maryland’s 50 Most Influential People. He has also been named one of Baltimore Region’s 20th Most Powerful Business Leaders. In 2014, Maryland Governor Larry Hogan appointed Dr. Basu as Chairman of the Maryland Economic Development Commission. Quite a mouthful, and he teaches global strategy at Johns Hopkins University and serves as the Chief Economist function for a number of organizations across the country. He has also read every one of Agatha Christie’s novels as an avid fan of James Bond, loves English football, Indian cricket, all the Baltimore teams, as do I, and lives with his wife and two daughters, Kimaya and Kohena. Dr. Basu, thank you again for joining us, and take it away.

Anirban Basu:

All right, let’s do this. Thank you so much, both of you, Jessica and Parker, for inviting me. I want to share my screen as it turns out, and going to go through some slides here. As had been noted, please use that Q&A function to ask your questions. Obviously, I hope to answer some of your questions with respect to the economy as I go through the material, but please don’t hesitate. Indeed, Parker and Jessica have told me that if there’s a question that fits neatly with what I’m speaking about in that moment, they’ll ask it while I’m going through the material. I will leave some time at the end parenthetically for questions and answers. My presentation today is entitled, Show Me the Money Supply. This is a Tom Cruise themed presentation. You’ll see that theming throughout the presentation whether you like it or not. I hope you don’t hate it, but it’s firmly baked within the cake.

This is Tom Cruise from the 1996 film, Jerry McGuire, in which he plays the role of a sports agent with a single client, the fictitious Arizona Cardinals wide receiver, Rod Tidwell, played by the actor, Cuba Gooding, Jr. In any case, it’s not about Tom Cruise so much as the economy, but the question then becomes, why wouldn’t an economist introduce the concept of money supply right from the get go? The topic of the economy is vast. So why because money supplied? Well, as it turns out, it’s at the heart of the matter. Much of the data I will show you today, our time series data. So the more contemporary data will be part of the right of the slide. This is Money Supply Graph back to 1959 and again, focusing on the right side of the slide, you can see that during much of the pandemic recovery period, this phenomenal growth in money supply. This is engineered largely by policymakers.

The Federal Reserve, expanding the size of balance sheet. Flooding the banking system with liquidity, driving interest rates as close to zero as was possible to try to induce people to borrow more and spend more, borrow more and invest more to countervail the worst effects of the pandemic on the economy. The federal government also is borrowing lots of money and spending lots of money in the economy. All of this [inaudible 00:05:03] to the benefit of money supply growth. From the perspective of economic recovery, this absolutely works. By the second quarter of 2021, U.S. gross domestic product is above its pre-pandemic level. So the pandemic undoes the economy during the spring of 2020. A bit more than a year later we’re back, at least along that dimension. However, that V-shaped very rapid economic recovery brings with it a bout of enduring inflation. The Federal Reserve, of course, has been contending with that for more than a year now.

They’ve been raising interest rates until recently, shrinking the size of their balance sheet, trying to reduce borrowing and spending, borrowing and investing to try to bring demand into conformity with supply to bring excess inflation out of the economy. So now money supply has been shrinking, you can see that heir. So money is more expensive, interest rates have gone higher, for instance. It’s more difficult to access. We’ll talk more about that and when money supply is disappearing, that can create some pretty risky business. One of the things we want to talk about are some of the risks inherent in the economy, and what’s the culprit here? Why have we gone from a period of very rapid economic recovery from the worst stage of the pandemic economically to speaking about the risk of recession in the next few months or at least at some point over the next 12 months? Well, again, the culprit here is inflation.

Now we economists, when we talk about inflation, we tend to talk about it in the context of its effect on interest rates and Federal Reserve policymaking. Of course, as stakeholders of CJM Wealth Advisers, many of us are concerned about that, not just as economists, but just as stakeholders in financial markets. But there’s another effect of this, of course, that’s on households. Households are walloped by these inflationary pressures and that, of course, has an economic impact as well. This is the U.S. Consumer Price Index 12 month percentage change. You see two lines here. The line in green is your overall rate of inflation, your all items Consumer Price Index, which over the past year has run at 4.9%, past year ending with April of 2023. Now the gold line is your so-called core inflation rate. That’s all items less food and energy.

Food energy prices are notoriously volatile but also susceptible to non-economic influences like Vladimir Putin as it turns out, but also droughts and natural disaster generally. So for much of this pandemic recovery period, food and energy prices are rising faster than most other prices. Now, food and energy prices have been generally speaking, falling more recently. So after the outbreak of hostilities in Ukraine, oil prices were trading above $120 a barrel. Today we’re looking at oil prices in the low 70s as it turns out. Egg prices have been falling since roughly December. I don’t know how many of you have become engrossed in a conversation about egg prices this year, often with neighbors. As you know, once you get involved in those conversations, almost impossible to extract oneself. Indeed, I delivered a presentation very early this year at the University of Delaware. The University of Delaware, of course, gave us the greatest quarterback in NFL history, Joe Flacco, but also their team name is the Blue Hens.

They’re the University of Delaware Blue Hens. I looked those Blue Hens right in the face and I said, “You ought to be raising chickens, you Blue Hens.” They also did not laugh at that. But the point is, egg prices were high and so it made sense to raise chickens. But since that time, those kinds of prices have come down. So we need stripped out food energy prices, you get that core inflation rate, that inflation measure is actually higher now, 5.5% year-over-year. In any case, inflation’s running well above the Federal Reserve’s 2% target, so the war on excess inflation persists even though the Federal Reserve has raised interest rates so significantly, and we’ll talk more about that in a couple of slides to come. Now again, there’s a cumulative effect to this because households are getting waylaid by this month after month after month, these high prices. So if you were to compare the price level in May of 2020, why May of 2020? That’s the first month of the economic recovery from the worst stages of the pandemic economically.

So we lost those 22 million jobs as a nation in March and April of 2020. We start to add back jobs in May. So if you look at what prices looked like in May of 2020 as the recovery commenced versus April of 2023, the last month which you have data, you look at the headline numbers down below, all items, Consumer Price Index up 18% in less than three years in a country that aspires to 2% inflation per annum. The so-called core rate of inflation down below, all items less food and energy, 15% inflation, again, in less than three years. The green colored bars show you things categorically, so energy price is up 55%. Used car and truck prices up 39% in less than three years. Transportation services, that includes things like airfare is up 27%. Tobacco and smoking product prices up 22%. New vehicle product prices up 22%. One of the worst things you can do, one of the worst things you can do is smoke in a new car because it’s bad for your health. It destroys the new car smell but renders also one susceptible to all these inflation pressures.

Of course, if you’re in Northern Virginia and Baltimore where I’m right now, it’s pretty smokey out there, thanks to these Canadian wildfires. So probably It’s just not a good idea to smoke generally. In any case, again, lots of cumulative effect here. Now it is true again that inflation has dissipated more recently. So to go back to the previous slide, back in June of 2022, if you look at this, overall inflation was running at 9% year-over-year. Now it’s down to 4.9%. So if I just show you the Consumer Price Index for the period April of 2022 versus April of 2023, just last year, you can see again the headline numbers at the bottom of the slide, 4.9% overall inflation, 5.5% on the core, but you still see some lumpy inflation rates here. Transportation services, again, things like airfare is up 11%. Shelter and food price is up 8%. Who does this affect the most, by the way? It’s people with lowest quintiles of income, people for whom food and shelter comprises a disproportionate share of their household budgets.

I think that’s one of the reasons the Federal Reserve is so aggressive in trying to get us back to 2% inflation. They know that people in lowest printouts of income are most affected by inflation include people on fixed incomes, let’s say people in their 70 and 80s as an example. So what do they turn to? They turn to their leading policy instrument, which is, of course, the fed funds rate, the overnight bank lending rate, the rate at which banks could borrow from one another overnight. Why do they do that? To throw up their reserves because you need a certain amount of reserves in the bank to make the loans outside of the bank, so you don’t want to run up against that constraint so that you want to make more loans. So here on the grant free the federal funds pocket range upper limits. I should point out that I did not create these slides, that was done by our economist, Sayer Niblett, who is a fabulous professional, but in any case, setting that aside.

So the lowest upper limit you can get here is 0.25%. Coming into the pandemic, the federal fund rate was non-zero, but then the pandemic sweeps through the economy. The Federal Reserve lowers interest rates as close as possible to zero, which is 0.25% since I’m graphing, again, the upper limit. It stays there for about two years. When inflation begins to blossom during the spring of 2021, they respond by doing precisely nothing. They presume that inflation is transitory. A synonym for transitory is fleeting. They think it’s purely supply chain driven, that the economy was coming out of its doldrums. People were becoming vaccinated. We had the surge in demand particularly for goods, but the supply chains had been closed to various degrees, of varying degrees. So supply was falling short of demand, that’s inflationary. But as supply chains healed, as they normalized, supply would rise up to meet demand, inflation would come back to its pre-pandemic 2%. Instead, what the Federal Reserve oversaw was the creation of a wage price spiral. So during the spring of 2021, prices take off.

Employees say, “My goodness, boss, look at this. Are you looking at the CPI data the way I am? Could I look at them all the time?” They actually never had before. But setting that aside, “Are you looking at these data? I need a raise. It’s getting very expensive to live out here.” Boss says, “No problem. The economy is come back very, very quickly at V-shaped recovery. I’ll just pass all my costs increases to my customers because in an inflation environment I can support higher profit margin. In fact, corporate profits are positively correlated with inflation.” Well, of course, we get another burst of inflation and now the employee comes back knocking on the door, “Boss, I need another raise.” “Okay.” So now you’re in the midst of a wage price spiral. The Federal Reserve to get inflation back to this 2% target has to break that wage price spiral, so that since March 16th of last year, they’ve been raising interest rates. First they dip their toe into the inflation fighting water, 0.25%; then 0.5% the next meeting; then four consecutive meetings of 0.75%, back to 0.5%; then 0.25%, 0.25% again.

Then on May 3rd, meaning a month ago, 0.25%. So what was a 0.25% rate of interest is now 5.25%. Now, most pundits and analysts and so on agree that the Federal Reserve will pause in June. So they meet June 13th, June 14th, and they will not raise rates this month, and we’ll get into why that is. But interest rates are much, much higher. Now, ostensibly, they’re not trying to destroy the economy, they’re trying to engineer a soft landing. What does that mean? They want to frustrate borrowing and spending, borrowing and investment by driving up the cost of capital, bringing demand down into conformity with supply to ring out excess inflation. But the question becomes, is it possible at this point to engineer a soft landing or is that mission impossible? That’s really the question here. Now the good news is that they still have some room to maneuver. The economy is not in recession right now. Let me talk a little about how they conceive of the issue.

These two quotes come from our Federal Reserve Chairman, Jerome Powell, who back in August of 2022 says the following quote, “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they’ll also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” For them, the definition of price stability is 2% inflation. So since they started finding inflation, we could make the argument that they started too late. But since that battle has begun, they’ve been very aggressive in their language and their actions, words and deeds. They’ve talked about raising interest rates, talked about fighting off inflation, and they, in fact, have raised interest rates quite significantly. In November of 2022, the Federal Reserve Chairman says the following quote, “Let me say this, it is very premature to be thinking about pausing,” even thinking about it. “So people, when they hear lags, they think about a pause.” What does that mean?

So when the Federal Reserve raises interest rates, whether on March 16, 2022 or May 3, 2023, the complete effect of that on the economy does not show up immediately. It takes a while to work through the economy. It could be as much as 18 to 24 months before an interest rate increase has its complete effect on the economy, which means even the March 22nd of … sorry, the March 16th of 2022 rate increase has not as had its complete effect on the economy, let alone let’s say, the four rate increases of 0.75% a piece. So there’s all these lag effects built up in the economy. So many stakeholders, including investors would say to the Federal Reserve, “Slow your roll. What are you doing here? You’ve raised rates at the fastest pace in more than four decades. Let these lag effects wash through the economy. It’ll bring growth down, bring inflation back down to 2%, your target, your mandate. You don’t keep raising rates because you’re going to drive the economy unnecessarily into a recession,” ’cause joinder to that comes from the Federal Reserve Chairman in the form of this third sentence, it’s very premature.

So in the span of three sentences, our Federal Reserve Chairman says the words very premature twice, not especially eloquent, clearly not written by ChatGPT, but it makes the point, “It’s very premature, in my view, to think about or to be talking about pausing our rate hike.” Now that was said seven months ago, it’s now June of 2023. It is true that they’re pausing in June because I think they want to see what these lag effects look like. They want to take a pause and, then they meet again in July and the bond market is suggesting that maybe they pause in June but start raising rates again in July, so we will see. But the war inflation is not yet done. But again, the good news is there is some underlying lingering momentum in the economy. So as an example, the broadest measure of U.S. economic progress is growth in gross domestic product, quarterly data, annualized rates of growth.

Now if you look at the left-hand side of the slide here, you can see the undoing of the economy during the first half of 2020, including that -29.9% performance through the second quarter of 2020. Then the V-shaped recovery, 35.3% during the third quarter of 2020. Several ensuing quarters of high single-digit rates of growth in an economy accustomed to growing 1 1/2 to 3% per annum, true. During the first half of 2022, America sustains a setback, two consecutive quarters of negative real GDP growth. The economy grew in nominal terms, but once you adjust it for inflation, it turns negative, satisfying a technical definition of recession, but then the third quarter, bounces back, 3.2%, 2.6% to conclude last year, the fourth quarter of ’22. During the first quarter of 2023, the U.S. economy grows 1.3%, which sounds pretty weak and it was, but misleading because a lot of that was about inventory decumulation, which really pushes the gross product estimates around.

But consumer spending was still pretty strong during that first quarter, consumer spending growing about 3.8% annualized pace during the quarter. Now the Atlanta Federal Reserve maintains a product known as GDPNow, which estimates current quarter gross domestic product, and that estimate right now sits at 2.0% for the current quarter. None of these are indicia of a recession. Indeed, they’re certain parts of the economy that have been especially strong, including as it turns out, the consumer. Here is U.S. retail sales, and these are monthly data, stretching to April of 2023. You can see the consumer has been on fire and spending massively. Ah, it is true that in November and December of last year, retail sales slipped. So retails came into 2023 with plentiful inventory. They discarded that merchandise aggressively right after the holiday shopping season. Sales took off in January, but then fell again in February and March, more discounting, sales come back a bit in April. We’ll come back to this. But in general, the consumer has been spending pretty aggressively, wouldn’t you say? Let me look at this from a circle perspective.

The consumer has tended to stare inflation right in the eyes and spent right through it, and I’ll give you an example. I mentioned that transportation services has been a source of significant inflation in recent years. Airfares during a recent 12-month period rose 17.7%. Now, I’ve been told by the folks at CJM, you’re speaking to a group of very successful people; not only our own staff members, but people who are with us as clients. Because they’re successful people, Anirban, when they board an airplane, they tend to be isle or window people. That’s who you are. You’re successful people, so you’re isle and window people, that’s who you are. When you get into your isle or window seat, there’s only one thing you’re hoping you’re praying for, and it is not the safety of the flight. It is not that because you presume the safety of the flight. That’s incidental.

No, the only thing you’re hoping for in that moment of that kind of history is an empty middle seat, and that’s all you want. That’s all you care about. You don’t have to feel embarrassed by that. Wanting a empty middle seat does not make you a bad person. It doesn’t make you a good person. It doesn’t make you a bad person, but the middle seat has been full, ’cause the consumer has been spending. You can see that in the form of lengthy security lines, so on and so forth. So the consumer has been spending and yes, supported by stimulus payments and accumulated savings during the pandemic. They didn’t take vacations then, so they had more money later on, all that, but also supported by a very strong labor market. This is net change in U.S. jobs, monthly data.

We’ve been adding jobs there since December of 2020, a month during which it was COVID intensive as it turns out, and also, pre-vaccination. We just got the data for May. In May, America has 339,000 jobs. The unemployment rate is 3.7%, and I will give you a forecast, my forecast later in this presentation. But I got to tell you, the economy has not worked out the way I would’ve expected in many cases. I’ll give you an example. If somebody had told me back in February of 2022, “Anirban, here what’s going to happen. On February 24th, the Russians are going to make a move on the Ukrainians. Natural gas and oil prices will skyrockets along with fertilizer prices, cooking oil, those kinds of prices. Then the next month, the Federal Reserve will start raising rates at the fastest pace in more than four decades, what do you think is going to happen with unemployment, Anirban?” Now at that time, March of 2022, the unemployment rate was 3.6%. I’m skeptical that I would’ve said, “It’s going to rise maybe to 3.7%,” but that’s what’s happened.

The economy has been incredibly resilient in the face of war and higher interest rates, higher cost of capital and bank failures like Silicon Valley Bank, March 10th; Signature Bank, March 12th; the issues at First Republic Bank, which was taken up by J.P. Morgan. That was your 14th largest bank in the country. Silicon Valley Bank was 16th, so Signature Bank was 19. So lots of headwinds out there, lots of dog room. Here’s the thing, as many people as American employers have collectively hired, they want to hire even more. According to the JOLTS, the job openings and labor turnover survey in April, 10.1 million available unfilled jobs in America, about 1.7 job openings in this country for every unemployed American. America’s still very much the land of opportunity. You want a job in America, there is one waiting for you. In fact, there are two. Well, that’s inflationary. You got 3.7% rate of unemployment, 10.1 million available unfilled jobs, almost 400,000 in construction. As we try to rebuild the nation’s infrastructure, all of that’s inflationary, because people are scarce and that puts upper pressure on wages.

The problem here is not simply a cyclical one, it’s not simply the fact that we’ve come out of the pandemic so aggressively from an economic growth perspective, it’s a structural one. The labor force is not growing rapidly enough to accommodate the needs, wants, aspirations of the people of this country, and the real problem here is, it’s men. Men are the problem. Some of the women that you ask might say, “Well, that’s a job proposition, sir. I’m only talking about the labor force dynamic. It’s not household chores or anything else.” So if you were to look at labor force participation rates in 1980 when music was good versus 2023, this is what you get. So you’re part of the labor force to be either working or looking for work. So I’m looking at the proportion of the eligible population that’s either working or looking for work, and then taking a delta between the proportion of 1980 versus 2023. So you look at the tabular data here, you see that top row there, which is also the bolded row?

To be part of the U.S. labor force, you have to be at least 16 years of age. In Canada, it’s 15, here it’s 16. So the labor force participation rate between 1980 and 2023 fell 1.2 percentage points, but it fell 9.4 percentage points among men, but rose 5.7 percentage points among women. So men jumped out of the labor force, women jumped in. Now you can break this down by age, 16 to 19 year olds -19.5 percentage points overall, -0.3 percentage points for men, -60 percentage points for women. What’s that about? That’s college. So you might remember in the 1970s, we lost a ton of manufacturing jobs in this country. The notion was that we were going to become an increasingly service sector-oriented economy, which proved to be true. To participate at the commanding heights of that economy, one would have to be quite gainfully educated, college degree, for instance, to become an engineer, a lawyer, a financial advisor, an economist, whatever it happens to be, an accountant, an actuary.

So if you’re in college, you’re less likely to offer your services to the labor force. 20-24 year olds, -5.6 percentage points overall, -13 percentage points for men, adds a one percentage point for women. What’s that about? Well, it could still be college, ’cause it probably takes most guys six to eight years to finish college. But then you look at 25 to 34 year olds, +3.6 percentage points overall, -6 percentage points for men, +12.6 percentage points, women, what are these young men doing? What are they up to? They’re neither working nor looking for work, and they’re 25 to 34 years of age. What are they doing? No one really knows cause everyone’s too scared to ask. But it probably involves a couch in a parent’s basement, maybe some video games, who knows? But not work at a construction job site or an Amazon facility or any other place. You might say, “Anirban, look, I’m pretty sure that CJM invited you to be an economist, to be unemotional, dispassionate, data-driven. You’re getting angry out there in computer labs. You’re getting pretty emotional.”

You might say to me, “Anirban, the idea of a 33-year-old American man sitting his parents’ basement playing video games while eating bologna and salami sandwiches that his parents made, maybe smoking some weed, that’s adorable.” I don’t disagree. I think that’s adorable. They’re less adorable when they’re 43. 35 to 44 year olds, +3.7 percentage points overall, -5 percentage points for men, +11.8 percentage points for women. So it is often said, by the way, that men make more than women, which is true as it turns out. Men make more than women still statistically speaking. But young men do not make more than young women. Young women are far more less to own a home than a young man. So this is part of the challenge here, particularly for industries that are male dominated like construction, 87% male, manufacturing, 70% male, ’cause it means more labor market tightness. It puts upward pressure on wages, that’s inflationary. Here’s the thing, this gives you some sense of how hot the economy remains. Even though American employers have hired so many people, and again, we’ve recovered fully along this dimension, they want to hire even more.

If you were to compare job totals for this nation in February of 2020, why that month? That’s the month when we shut down the economy versus May of 2023, last month virtual of data, America is up 3.7 million jobs. So we’ve recovered. The top segment here is professional business services, that’s your law firms, your accounting firms. Many white collar jobs are allocated into those segments. So it’s a very large part of the U.S. economy, which helps explain part of its privacy here, but also disproportionately, it offers the opportunity for people to work remotely, and that’s what many Americans want. They want to work remotely. A recent survey indicates that 68% of Americans, more than two in three want to work remotely, not at a job site. They don’t want to commute, they don’t want to be with their colleagues. They do not like their colleagues. A separate survey finds that 57% of Americans find their colleagues to be annoying because they overshare, meaning, “I asked you what you did this weekend. I did not intend for you to answer.”

They take credit for one another’s work, but the number one reason people find their colleagues to be annoying, they interrupt during meetings, which can happen on Zoom as it turns out, it typically does. Nonetheless, there is this general preference for remote work. At the bottom of the list, leisure and hospitality, that’s your hotel and restaurant worker. By and large, it’s the lowest wage segment of the economy, so often out competed for human capital along the dimension of compensation, but also as a general proposition, does not offer the opportunity for people to work remotely. Now, these labor shortages have been even greater in regions of the country that have been growing with particular pace. This employment growth from the 25 largest metropolitan areas in our country, February of 2020, again, the last month before we shut down the economy versus April of 2023, the last month, which are the sub-national data. Notice the primacy of the American South. We’ve got people on this call from all over the country, but notice the primacy of the American South.

Dallas, Tampa, San Antonio, Orlando, Charlotte, Phoenix, Orlando, Riverside, California, Houston, Miami, San Diego, that’s where the job growth has been fastest. That’s where the population growth has been, that’s where the job growth has been. Now Philadelphia sneaks into that left-hand column, but for the most part, the Northeast Corridor is in the right-hand column. You can see Washington and Baltimore, and several others from Washington to Baltimore here among the least dynamic economically in terms of job growth over the last three plus years. You can see New York or Boston also in the right-hand column along with the Midwest. So Chicago, Minneapolis, Detroit, St. Louis, in that right-hand column, slower growth. That’s not where the population growth has been as rapid, that’s not where the job growth has been as rapid. Now I find this slide to be interesting, but the next slide is far more important macroeconomically and from an investor perspective, same 25 major metropolitan areas. But instead of percentage job growth, it’s unemployment rates. Here’s the problem: these unemployment rates are too low.

You say, “Anirban, that’s crazy talk. We love low rates of unemployment. We love it when people graduate from an apprenticeship program, high school and college and can quickly secure opportunity. We love it when somebody loses job through no fault of their own, let’s say, and can quickly find replacement employment.” Yes, we view it as a sign of national economic strength, economic vigor, but it’s less positive when you’ve got 10.1 million available unfilled jobs and inflation is still raging across the countryside. So when the Federal Reserve looks at these data and says, “I can’t stand by this. I can’t allow this equilibrium to stand, because I’m seeing wage growth between 4 and 5% because the labor market is still too tight. There’s too much demand for workers, and to get back to 2% inflation, I might need maybe three to three-and-a-half percent wage growth, but I can’t deal with the wage growth now. Somebody has got to lose their job. This labor market has got to be loosened up.”

So when the Federal Reserve Chairman said back in August, “I’m going to cause some pain to households,” that’s what he’s talking about, and so the war inflation is not yet done. Interest rates are already high and could rise further, and that dynamic along with some other things we can talk about increases the risk of recession. Again, 1996, Jerry McGuire, I cried. I cried. I wept. I wept. Now before I come with the definition of a recession, let me define it for you. I had mentioned a moment ago that we sustained those two consecutive quarters of negative real GDP growth during 2022’s initial half satisfying a technical definition of recession, but not that definition of recession. This is my definition. “The National Bureau of Economic Resources Business Cycle Dating Committee is the official recession scorekeeper. They’re the arbiter of when recessions begin and if they occur at all.” Accordingly, they’re the ones that maintain a chronology of U.S. business cycles. So they’re the ones who told us in 2002 that the recession of 2001 began in March of 2001 and ended in November of that year.

Now, the traditional definition of a recession is, quote, “a significant decline, a significant decline in economic activity that spread across the economy and that lasts more than a few months.” That’s the recession that they declared in 2020 begins in February of 2020, ends in April of 2020, arguably not more than a few months. They declared it a recession [inaudible 00:32:32] because they can, they can do whatever they please. They sit in Cambridge, Massachusetts and they can do whatever they please. They are the definition of a recession. What’s more, there is no fixed rule about what indicators contributed information to NBER’s process or how they’re weighted in the termination of a recession. They can look at wherever they please they can. Now, as a practical matter, they look at employment, unemployment, gross domestic product, industrial production, retail sales, but they can look at whatever they please, stock market, whatever.

Because the government statistics NBER relies on are published at various lags, the NBER Committee cannot officially designate a recession until after it starts and often, not until it’s over. So for instance, we shut down the economy in March of 2020. So it was open in February, shut down in March. Clearly there was a recession, but they could not declare that until the confirming data arrived. Okay. So again, we’re not in a recession now. How could you be with consumers still spending and with so many jobs being created? But there are some signs. So for instance, for much of this pandemic recovery period, the mantra among many CEOs has been, “Let me case demand. Clients are coming back very, very quickly. There’s lots of unmet demand out there. If I can meet that demand, I hire the employees, I lease the warehouse space, I purchase the equipment and I meet that demand, I gain that market share. In an inflation environment, I can monetize that market share. I can drive profits higher. I’ve got more room to push margins higher in an inflation environment.”

But more recently, there seems to be more emphasis on cost containment. This comes from the U.S. gross domestic product data, non-residential fixed investment in equipment. You can see for the last two quarters, this investment has been in decline. Now that could be in part because of the supply chain issues. They’re still lingering. So I spoke to a group of mechanical contractors recently out of Washington D.C. and they told me their lead time to acquire switch gear being for electrical equipment was something like 50, 60, 70 weeks, in many cases; in some cases, 100 weeks, two years. They told me their lead time for generators are similar to that, so there’s that. But I think this is because more and more businesses, more and more CEOs are deciding, “I need to think about my cost structure. I took on a lot of costs during this pandemic recovery period, maybe I hired too many people. Maybe I took on too much capital expense.”

According to the November 2022 PwC survey of U.S. executives, 26% of firms are planning to reduce the number of full-time employees over the next 12 to 18 months. Now you can see from the employment data, there’s still lot of hiring, but the plans are in place to maybe let some people go. In August of 2022, 50% of firms said they already had or had a plan in place to reduce overall headcount. Four to five executives surveyed by PwC in November of 2022, said a recession was coming within the next six months. They’re wrong about that. That was said seven months ago. A recession did not come, but again, they’re nervous. They’re planning maybe for layoffs. In fact, some firms have already, of course, moved forward with the layoffs. There’s some noteworthy layoffs in 2022, 2023. At the top of this here is Amazon. The CEO, there is Andy Jassy. Andy Jassy has announced two layoffs recently, the most recent being 9,000 jobs, totaling 27,000 jobs.

But here’s the thing, Andy Jassy did one other thing at least. He said to his white collared workforce, “You’ve got to come into the office three days a week.” “Yeah, that’s right. You’ve got to come into the office three days in one week.” Are we barbarians? Is this how we treat people? Three days in the office? I can’t imagine. Now my guess is that was done to foment collaboration, innovation, supervision, but also try to get some people to quit and some people have quit over that policy. Meta, the CEO there, of course, is Mark Zuckerberg. He announced a massive layoff. But during a recent earnings call, he said the words efficient or efficiency 41 times. He’s declared this the year of efficiency at Meta. So many CEOs watched as his share price was 100% so far this year, at least until the last few days. Looking at Meta and saying, “You know what? If that’s how you drive up your share price by cutting costs, by focusing on efficiency, maybe I shouldn’t be chasing demand, maybe I should cut costs.”

This shifting attitude in an interest rate-driven environment is particularly impactful on interest rate sensitive segments like real estate. So let’s talk a little about real estate. So this is from 1992, A Few Good Men playing the part of Lieutenant Daniel Kafee, a young military attorney. So I begin this story talking about interest rates. I think that’s the right place to begin. That’s what’s really shifted over the past year, the trajectory of the economy over the past year, but also going forward. So let me show you two interest rates of interest. The 15-year fixed mortgage rate here is in green and the 30-year fixed mortgage rate here is in gold. Green and gold, of course, The Color of Money, which was the 1986 Tom Cruise film also starring Paul Newman playing the part of Fast Eddie Felson. In any case, in January of 2022, the average 30-year fixed mortgage rate according to Freddie Mac was 3.22%, according to the most recent weekly data, 6.79%.

Now, some of you might say to me, “Anirban, a 6.79% mortgage rate on a 30-year fixed is not a big deal. My first mortgage rate was 18%. My first mortgage rate was 15%.” I’ve had people come up to me after presentations bragging about the fact that they used to pay 15% interest. I am not impressed, but it is an interesting history, and for those folks, 6.79% would not seem especially onerous, however, to millennials and generation Z, preposterous. That’s who’s really subtracted themselves from the would be buyer market, is that first-time buyer or the first-time move up buyer, the more interest rate sensitive buyers. Now as I move toward the tail end of this presentation, I want to show you a number of leading economic indicators because I want to pivot from a discussion of what’s been going on to the discussion of what’s likely to happen going forward. Now the whole purchasing process often begins with a mortgage application.

So unless you’re a private equity firm or a quite well-heeled American household, people typically have to borrow money to purchase a home. This is your U.S. Mortgage Loan Applications Composite Index for the Mortgage Bank Association, the measure of loan applications. It is down this index by 80% since its 2021 peak. Again, who has subtracted themselves larger from that marketplace? It’s that first-time buyer, that millennial or generation Z buyer. Generation Z is not quite old enough to be in prime home-buying age, but they’re getting there. Within five years they will be there. But so it tells us the story, and predictably with high reward rates, we’ve seen some price adjustments. So this is the S&P Case-Shiller U.S. National Home Price Index. You can see after a period of phenomenal growth in home prices, you saw some give back, except that during the most recent month, home prices bounced a bit higher. I’ve been amazed by this.

I would not have predicted the kind of strength here. Now, true, the inventory of unsold homes is very scant, so people are competing over very few homes. By and large, all the entry level or first-time buyer homes have been bought. So what’s left is an inventory of quite pricey housing as it turns out. You see a lot of cash deals out there, and you still see some bidding wars. Now again, there was a period during which home prices were in decline, particularly in certain markets. So I can break this down by metropolitan area. This is the S&P Case-Shiller Home Price Index by Metropolitan Area, total month percentage changed. You can see some technology-intensive markets like Seattle and San Francisco, also San Diego giving back some home price gains over the last 12 months through March. But then you look at the bottom there, Miami, Tampa, Charlotte, Atlanta, again, the American South with still some price gains.

You would not know the interest rates have increased in Miami when there’s so much cash pouring into that market from Russia, from Latin America, so on and so forth. So property has been very expensive there as you know, getting more expensive. But here’s the thing, so you see a mix here, but in the next slide, you will not see a mix. The next slide is just the one-month percentage change. This is March of 2023 itself, so here you go. The 0% line is left-hand access. Everything is gaining in terms of home price again. You could make the argument, the home market or a single-family housing market has already bottomed out. It’s already had its recession. There’s similar appetite to buy homes. I think one of the things that’s happening here is that people are always looking for diversification opportunities. They’re in equities, they’re in bonds, of course. S&P is trading right now at 4265.11. It’s down about 18.59 points so far today, but it’s been strong. It’s been a strong performance.

So people say, “Oh, I’ve got some equity market gains. We’ll see where the equity markets go, but to diversify my portfolio, maybe I should buy a property.” So you see a lot of these all-cash deals and the homes at the upper end of the spectrum due to trade at handsome prices. Now I want to show you that leading indicator, but this one relates more to construction of homes. This is U.S. residential building permits. That’s a leading indicator because if you’re a builder, you’ve got to pull a permit before you build. You see the yellow line there? That single-family building permits. That has been down recently until, again, a recent bounce back, ’cause home builders see, “Oh, my goodness, housing market’s holding up better than we thought. There’s still some unmet demand out there.” Permits have been actually pushing higher very recently. So again, I’ve been surprised by that.

I would’ve thought that given the interest rates have risen so much and that they’re set to rise perhaps even further, we’ll see, that you’d see more permanent downward pressure on the single family market. Actually, the market we’ve seeing more weakness recently has been the multifamily market if you look at that downward trajectory. That includes your apartment construction. I would’ve thought this segment would’ve been stronger because you have to have a place to live. All things being equal, high mortgage rates are good for the apartment rental market. If you can’t buy a home because of affordability issues ’cause of higher mortgage rates or lack of inventory or high prices, generally, you’re going to rent. Well, if you’re a millennial for instance, or if you’re generation Z, you’re going to rent. But here’s the thing that’s happening. I think that this is really driven by the lack of access to capital. Among many developers. There’s developers that pull permits.

What they’re finding is that bankers in many cases are more reluctant to expose themselves to real estate fundamentals, dynamics. We’ve got 1 1/2 trillion dollars in commercial real estate related debt to refinance between now in the end of 2025, the so-called debt maturity wall. Who’s going to refinance that debt? Who’s going to finance more apartment buildings? Because bankers at least are risk averse right now given what’s happened at Silicon Valley Bank, Signature Bank, First Republic, Credit Suisse, Deutsche Bank, more recently, PAC West and Western Alliance. So there’s still these banking issues out there. Now this next measure pertains more to commercial real estate. It is the Architecture Billings Index. It’s a reflection on how busy architects are. You see that 50-yard line running west, east across that slide? Any reading above 50 means that architects are collectively busier now than they were the previous month.

You can see that during much of the pandemic recovery period, architects are getting busier and busier and busier. Well, of course, it is. The economy was coming back very strong and people were looking for income. You might remember that for a while there interest rates were very low. So it’s difficult to generate interest income. Bonds were not yielding. The last year fixed income got its last name back, but prior to that, people were looking for other sources of income. Real estate is one of them because real estate generates rents and hotel daily room charges, that kind of thing. That kept architects busy because property is being purchased and then repositioned is the marketplace, design builds. But six of the past seven months, the architects have be getting less busy. Again, I think there’s a big issue in commercial real estate that last year, the U.S. economy grew 2.1%. We added hundreds of thousands of jobs in white collar segments, and yet, the U.S. office vacancy rate rose last year as remote work stays pervasive.

This is misleading, this 12.5%, there’s a lot more office space vacant than that, but it’s not considered vacant statistically because it’s still leased. As these lease renewals come up, you’re going to see a push higher. There’s another segment of commercial that’s in trouble, at least one. That’s your malls, your shopping malls. This is vacancy and shopping malls. Yeah, consumers have been spending, but increasingly online is getting market share. So something like one in four malls is set to fail within the next three to five years. We saw a lot of retail bankruptcy during the pandemic, so Brooks Brothers, Francesca’s, Pier 1 Imports, GNC all go bankrupt. With that comes lots of foreclosures and many of those operated in malls. So watch out for commercial real estate. It is one of the real drags on the economy going forward because these properties are simply not cash flow sufficiently and they’ve got a lot of debts against them and somebody holds that paper. Okay, enough of that. Let’s go to the forecast now and then we can open for Q&A.

Just give me about three or four more minutes here and then we can go to Q&A. So it’s a 2014 film science fiction, not my favorite Tom Cruise film in the interest of full disclosure, but an amazing transition slide, so it makes the cut. Now, you cannot have a recession unless the consumer participates, because they’re about 70% of aggregate demand. So as long as the consumer is spending, no recession by and large. So one of the things that we do is we monitor their psychology. Are they happy? ‘Cause the theory is that if they’re happy, they’re more likely to spend. So this is the University of Michigan’s Index of Consumer Sentiment. Where is the consumer right now psychologically? They’re miserable. What has them so miserable more than any other factor is inflation. They’re roughly where they were in 2008 psychologically in the midst of the global financial crisis. They’re angry about it. People ask me all the time, “Anirban, why do people drive angry?” ‘Cause they’re angry, generally speaking, and they’re not the only ones to become quite pessimistic.

So I talked about the PwC survey data, and that largely relates to large corporate CEOs. You could see the consumer is downcast, downbeat, small businesses too. This is from the National Federation Independent Businesses Survey Index or Small Business Optimism, questioned small business America, “Is it a good time to expand your business over the next three months?” In April, only 3% said yes, akin to where we were in ’08 or ’09. They would like to expand their business, mind you. They live for that. But they can’t find workers, can’t retain workers, can’t afford workers, can’t afford their healthcare premium. They suffer equipment delays and shortages. Their materials prices have gone up. So concrete prices, as an example, are 13% over the past year. So is it a good time to expand? Many of them would say no. Now these are considered soft data, the psychological data, survey data. This is a bit harder. This is the U.S. Leading Economic Index on the Conference Board. It’s 10 that the indicators all bundled.

The one indicator that I’m graphing for you here, actually I’ll say a niblet from our staff graphed here. Now this is an index that predicted the 2001 economic downturn, predicted ’07, ’08, ’09. Now it’s telling us tougher times are in front of us. The economy has been stubbornly resilient so far, but there’s a lot of lag effects in the economy. There’s tightening credit conditions. Consumers have taken a lot of debt. They’re not happy with life as a general proposition. So these measures at least taken collectively suggest to me that a recession is quite likely, you’ve got an inventory cycle working against us. This is business inventories. So look at the slice in the middle there. That’s the green slice. That’s retail inventories. I had mentioned that retail sales actually fell in November and December, then again in February, March. There’s been lots of discounting. Maybe you heard some negative things from Home Depot and Target lately, again, the middle market.

So when retailers see that after discount merchandise to move it, they order less from the merchant wholesale. That’s your distributors or middlemen and women. Their inventories have risen. You can see that. When they see their inventories rise, they order less from the manufacturers, that light blue down below, manufacturing inventories are up. If you look at the Purchasing Managers’ Index, which is from the Institute for Supply Management, it’s one of the federal leading indicators for our economists, the manufacturing indicator is sitting at 46.9. Well, that’s below 50. That means manufacturing is now in retrenchment. So again, all of these measures suggest a recession is quite likely. This one screams that a recession is coming. This is your U.S. Treasury Yields. It’s your yield curve. Again, two interest rates of interest, the yield on the one-year Treasury is in gold. The yield on the 10-year Treasury is in green. So typically, you’d expect the interest rate or yield on a 10-year instrument to be above that on a one-year Treasury. If I want to buy a U.S. Treasury thereby, lending to the federal government for 10 years, I’m not going to see my principle for a decade. I want to demand more interest in the interim per annum to reward me for my patience. Conversely, if I buy a one-year U.S. Treasury, I want to see my principal in 12 months risk-free, now that the ceiling is behind us, and so I don’t need to be so richly compensated. But occasionally, the bond market goes topsy-curvy, upside down, inside out, Diana Ross. The gold line, the yield on the one-year goes above the green line, the yield on the 10 year. These gray shaded areas are periods of a recession dating back several decades.

So where do you see the gold line go above the green line, this yield curve inversion? Just before the 1970 recession, before ’73, ’74, ’75, before 1980, before ’81, ’82, before 1990, 9 91 before 2001, before ’07, ’08, ’09, not so much before 2020 that was caused by something else. But now we have massive inversion of the yield curve as it got up here, about 1.4 percentage points in terms of that inversion. It’s screaming recession. I think a recession is coming, and maybe you can’t handle the truth. Now you might say, “Anirban, a couple of things. First of all, it’s not the truth. It’s your forecast. Now you just said that the economy has not worked out the way you expected.” Fair enough. This is not about you buying into my forecast, not at all. I’m agnostic with respect to that. My goal today has been to do some issue spotting on your behalf, looking at some of the economic risks out there so you can think about your portfolio and other aspects of your economic life.

You can refine your own outlook for economy. You might also point out to me, “That wasn’t said by Tom Cruise, sir. That was said by Jack Nicholson in 1992, A Few Good Men.” Fair enough. Jack Nicholson played the part of Colonel Nathan Jessup and he’s on the stand. He is being grilled by young military attorney, Lieutenant Daniel Kaffe, who eventually asked him a question that elicits this response, which is an admission of guilt. That young military attorney, Lieutenant Daniel Kafee, well, that role was played by one young and quite handsome Tom Cruise. I think the economy gets worse before it gets better. Now you might see a bit of a bounce back in the second quarter of gross investment product because again, the first quarter was weakened by inventory deaccumulation. You might see some inventory rebuilt during the summer spending months, and again, we’re the last month of that, of the quarter as it turns out.

But then I think the weakness comes later in the year. In fact, I think the recession begins September 5th, thanks to omnibus, check up. At no point have you demonstrated enough insight to forecast that with that level of specificity. I don’t disagree, but what is September 5th? It’s day after Labor Day, and I think that’s what it really catches up to us, that consumers will continue to spend and travel during the summer months. But come Labor Day, after that weekend, they;; look at their credit card balances. Some have to start paying back their student loans. That’s when recession begins, and I think we’re going to see more layoff announcements between now and then. The global economy is weakening, which is reinforcing our economic weakness.

Our economy is weakening, inventory cycle, so on. Bordering costs are higher, that’s incontrovertible and excess inflation persists. Some segments seem to hold up better than others include public construction, grocery stores at multifamily housing, at least from the perspective of leasing. We got to eat, a lot of money lined up for infrastructure, need a place to live. At some point the Federal Reserve will stop raising rates and as importantly, will start lowering them. Now the bond market is saying different things, but now the bond market seems to be agreeing with the notion that they won’t start reducing rates until 2024, though, we’ll see. That will spawn the next growth cycle for America. But until then, I think recession conditions are set to prevail at somewhere over the next 12 months. I think it could a bit sooner than that. Of course, again, I could be wrong. I am an economist. With that, thank you very much to CJM for the opportunity to be with all of you today. I’ll stop sharing and we’ll turn it over to Q&A.

Parker Trasborg:

Thank you. That was excellent. We did have a question come through, “How does wealth disparity in society affect the various charts that you presented? Is there a large percentage of the population that doesn’t have dispensable income to participate as they may have been able to?”

Anirban Basu:

Yeah, as I pointed out, inflation is particularly high in those categories that would most impact the people in the lowest quintile of income, food prices for instance, and also shelter prices. Yes, we have an incredible number of Americans who depend exclusively on, for instance, Social Security for their income. About 40% of people are seeing Social Security, depend on that exclusively for their retirement income. It’s not meant to be that, it’s meant to be an income supplement, but again, 40% depend exclusively on that for their income. Obviously., A lot of the savings generated during the pandemic from stimulus payments and foregone vacations, so on and so on, that money’s been spent down. So during the peak, as it turns out, we had about 2.3 trillion in excess savings at the household level.

So again, foregone vacations and other experiences and stimulus payments, all of that, 2.3 trillion in excess savings is what above and beyond what would’ve transpired but for the pandemic. About 1.3 trillion of that has been spent already, so we’re down to a trillion dollars in excess savings. But a lot of that trillion dollars is held by people in the highest quintile of income. So people at the lowest quintiles of income have spent through those savings. The credit card balances are rising. Many of them now have to restart paying student loans. You put all that together, you’re going to see in that lowest quintiles of income, let’s say the lowest two quintiles of income, a lot of pressure, especially if I’m right, that the labor markets softens for the months ahead.

Parker Trasborg:

Thank you. Did have a question about the debt ceiling, which they did wrap up on Saturday, “What is the impact on the economy here in the U.S. and relations with other world countries if they just keep with the political infighting as they renegotiate this every couple of years?

Anirban Basu:

Yeah, I don’t think it helps America. It said that markets hate uncertainty, and this is a source of uncertainty, but one has to say that the markets is not seen particularly roiled by this. Neither the bond markets or nor the equity markets seem to take this very seriously. The equity markets were rising for the most part as they reached that agreement, there was the presumption they’re going to reach that agreement. Once they reached the agreement, the market gave back a little, you might know, because you buy the rumor you sell on the news.

So the presumption was they were going to make an agreement, it was catastrophic. They weren’t going to do it. There’s a selection year next year and incumbents want to be reelected. If you want to be reelected, you want to create an economic crisis. But in January 2025, apparently, we’re going to revisit this, and we’ll see what that looks like. But by that point, we have a new president and all those kinds of things, so very different dynamics. Actually, we might have the same president still be reelected. Let me be clear about that. But it’ll be a new presidential administration, one way or the other.

Parker Trasborg:

Yes. A question around cryptocurrency with the Fed and potentially banks looking at issuing their own currencies, should we be concerned about that at all?

Anirban Basu:

Oh, I don’t think we should be concerned necessarily unless we’re owners of Bitcoin or something like that because here’s the thing. I’m often told by often young men, like 27 years old, who are the leading advocates of Bitcoin. “It’s digital gold, man.” They’ll say, “It’s digital gold, man.” I’m like, “Don’t call me, man.” But then I’m also like, “Why do you say that?” They say, “Well, it’s the currency of the internet.” I said, “Well, my credit card works on the internet. My PayPal works on the internet. What do I need digital currency for or cryptocurrency?” So what is the difference between cryptocurrency and digital currency? Digital currency comes from governments. It’s government backed, government issued. So the Treasury Department has been researching for a couple of years now their own U.S. digital currency, which could actually compete with Bitcoin and Ethereum and Litecoin and Ripple and so on and so forth.

So I think that as you see these governments put forth these digital currencies, that’s going to create more competition for Bitcoin and so on and so forth. So with the SEC coming down on Coinbase and other companies, all this regulatory uncertainty and with more competition coming from governance in this space, that’s why I’m concerned about the long-term value of Bitcoin. Look, Bitcoin is 27,000, 26,000, whatever it’s today. But yeah, anyway, I’m not worried about it, but I would be thinking about this if I had made a lot of money in cryptocurrencies about whether I would continue to.

Parker Trasborg:

A question around the recession that’s going to start on September 5th, “How long do you think it will last, and how deep do you think it will be?”

Anirban Basu:

Yeah, I think it’ll be actually a quite shallow recession. I’ll tell you why. It’s because we’ve already had these rolling recessions. As I mentioned a little bit about this, you’ve seen some retrenchment in the technology sector. Big tech has already announced some serious layoffs. You’ve seen the housing market maybe even bottom out already. So some of the imbalances that have been in the economy have already been worked out even before we entered an economy-wide recession. So I think the recession is going to be quite mild, and I think the Federal Reserve is going to come forth with interest rate cuts in 2024, and so the economy is going to weaken for a time, but I don’t think it’s going to be a very lengthy time.

Parker Trasborg:

I have one last question, and we’ll end hopefully, on a positive note, “What are the top factors that are actually keeping the economy steady right now?” Which you did cover a little bit throughout the presentation.

Anirban Basu:

I would say it’s lag effects. That’s what this has been about, Parker, lag effects. That’s why it’s not very interesting. But you’ve had all these things take place in recent years. So for instance, you’ve had the interest rate increases, but before that, you had interest rate decreases. Stimulus has taken some time to work through the economy. You had all that fiscal stimulus, whether under the Trump or Biden Administration, American Rescue Plan Act, signed by President Biden, March 11th of 2021, the Infrastructure Investment and Jobs Act signed by him on November 15th of 2021. Before that, it was the CARES Act signed by Donald Trump, March 27th of 2020, a $2.2 trillion package, he signed the Appropriations Act, signed by him on December 27th of 2020, $960 billion in stimulus.

So this stimulus is still working its way through the economy along with all that previous marketing stimulus. But now what you’re seeing is the stimulus is starting to go away. The fiscal stimulus is starting to wane in its terms of its impact on the economy. Now, of course, more recently, we’ve had interest rate increases. You’ve got all those negative lag effects now built into the economy. That’s why I think the economy gets worse before it gets better. That’s why I’m predicting a recession, and maybe it’s not September 5th. It could be maybe the 6th or the 7th.

Parker Trasborg:

Okay. Thank you. That actually wraps up all the time we have for today. I really appreciate your time, Dr. Basu, and the insight and the entertaining presentation for today. At CJM, we have a big focus on education and just awareness of what’s going on, and hopefully, today’s presentation helped fulfill that, our goal there and appreciate everyone sitting with us as we try a new format here on Zoom versus an in-person meeting as well. Again, that’s all the time for today. Thank you all so much for your time for joining us, and feel free to reach out if you’ve got any feedback or any questions that we didn’t get answered for you today that we can maybe answer sometime in the future. That concludes the presentation, and we will see you all sometime soon. Thank you.

Jessica Ness:

Thank you.

Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss the events that unfolded in the first quarter of 2023 including the collapse of Silicon Valley Bank, and look ahead to the remainder of the year.

Parker Trasborg:

Hi, my name is Parker Trasborg. I’m a Senior Financial Adviser here with CJM Wealth Advisers and again, today we have with us Kevin Donovan, our Portfolio Research Director. Kevin and I are going to chat for a few minutes about what happened in the first quarter of 2023 as far as markets.

So the big news this quarter was the failure of Silicon Valley Bank and the concerns about other regional banks here in the US. Can you shed some light about that Kevin?

Kevin Donovan:

Sure. This all happened kind of mid-March, but it’s interesting to see from a market’s point of view what happened just a couple days before this bank crisis started. So if you remember Fed Chairman Powell was testifying on Capitol Hill, I believe it was on a Tuesday. He said that he expects that the Fed is going to have to continue to increase interest rates maybe at an accelerated pace. This is not what the market was expecting because in the beginning of the year, stocks had started to rise because people thought that the Fed was close to ending its interest rate increases because the rate of inflation had been going down.

When Powell said this, it concerned investors and stocks started to sell off. Just a day or two later, this whole banking crisis blew up. So Silicon Valley Bank had a run by its depositors and it failed over the weekend. Another bank, Signature Bank, also failed. So it was a big crisis in the banking industry. But what this did from a stock investor’s point of view, it made the likelihood that the Fed would continue to increase interest rates at an accelerated rate less likely, because in order to keep a lid on this financial crisis, the Fed doesn’t want to have to continue raising interest rates.

So this led to a rethink among people about well the Fed actually may not be increasing interest rates as much as it thinks it has to. So the markets actually responded well to this whole crisis and stocks rose after falling early in that week. They rose and they rose strongly throughout the end of the quarter and we had a pretty good quarter in the markets. So let me just show you a couple… Oh sorry, go ahead.

Parker Trasborg:

Well, I was just going to note that ’22, as everyone knows, was very rough, but with stocks and bonds down double digits throughout the year, we hit the high of last year actually on January 3rd and it was pretty much downhill from there.

So yeah, why don’t you tell us a little bit more about what’s happened so far this year? It turned out bad news was good news as far as the bank crisis went.

Kevin Donovan:

Right, for everyone not invested in that bank, of course, which we had hardly any exposure to for our clients. So yeah, the first quarter of this year, mirror image from last year, and let’s look at the charts right here.

So you can see the two blue lines on the top are the S&P 500 and the International Stock Index. They were both up about 7%. So a really good quarter for those indexes. Bonds, after having historic declines last year as the Fed was jacking up interest rates, that index was up 3% in the first quarter.

But look at the bottom line there in the orange, the Dow Jones Industrial Average. That was barely positive and it was negative up until a day or two before the quarter ended. The reason for this was that the S&P was up so strongly because the large growth funds such as Apple, Microsoft, Amazon, Nvidia, these stocks make up a bulk of the S&P 500’s performance and especially its outperformance in their first quarter. So these stocks were all up double digits. Nvidia was up over 80% in the quarter and that really increased the S&P 500’s performance for the quarter.

But it wasn’t a very broad based, strong upward move in the markets, as you can tell from the Dow Jones Industrials being just barely positive. I can show this even further if we go back to this. Our next chart shows these same indexes but from the beginning of last year. So it includes all the selloff of last year and if you can see that the lines are completely flipped. So the Dow Jones Industrial Average was the best performing index since the beginning of last year. It was still down 8%, but it did much better than the S&P 500, which is down 14% over that time. So even though the S&P had a great quarter, it’s still down since the beginning of 2021. It has a lot of ground to make up to overtake the Dow since that time.

So yeah, I mean that’s kind of the story of this year versus last year. This year’s a growth stock story with the big household names in the tech industry doing so well. Last year they all did really, really poorly and value stocks such as energy stocks, financial stocks, they did well and they’re underperforming so far this year.

Parker Trasborg:

It’s kind of reminiscent of back a couple years ago when the FAANG stocks were just really driving all the growth here in the US indices. So what are we looking at going ahead here throughout the rest of 2023, Kevin?

Kevin Donovan:

Well, I mentioned that the bank crisis kind of had a positive impact on stocks in the short run at the end of the quarter. Down the line, it may not have such a positive impact. The flight of depositors from these mid-tier banks is still ongoing. Most of the deposits are going from those mid-tier banks into the larger banks. But what this may do is it may stop those mid-tier banks from lending out to their clients and it may act as a further brake on the economy.

Many economists actually are calling for a recession at the end of this year or early next year. Now they’ve been saying this ever since the Fed started increasing interest rates a year and a half ago and it keeps getting pushed down the line as to when this is supposed to start. Employment has been very strong, unemployment has been very low and that’s kind of pushed back the start date of a possible recession, but it’s still out there as a possibility. So that’s something we’re going to keep an eye on.

We’re not jumping all into the growth stock bandwagon right now. We want to keep our feet in both the growth and the value side. One of the reasons why we have a diversified portfolio is that you never know what’s going to happen. I mean, this banking crisis is a case in point. This kind of came out of the blue for markets and if you didn’t have a diversified portfolio, you might not have fared as well during that.

So the recession risk is out there. We’re not saying that we’re definitely going to have one, but we have to be aware that it is a possibility. According to the economist’s, a very strong possibility later this year and maybe early next year.

Parker Trasborg:

Similar story, as we talked about in January as well, bonds are now yielding something, so they’re a little bit more palatable to hold than what they were a couple years ago besides for diversification. So we’ll actually start to yield something there and like we mentioned before too, if the Fed has to start cutting rates, bonds are poised to do decently well still.

Thank you Kevin. I appreciate the time today. That is it for now. If anyone has any specific questions, feel free to reach out directly to your planner. Again, we are CJM Wealth Advisers. My name is Parker Trasborg. I’ve got Kevin Donovan, and we will see you next time. Thank you.

Kevin Donovan:

Bye.

2013

“Breaking Bad” ended, “Thrift Shop” by Macklemore was the #1 song of the year and “Iron Man 3” was the top grossing movie.

Like this year, in 2013 the debt-ceiling crisis began in January when the U.S. reached its debt ceiling limit. Republicans opposed raising it unless Obamacare was defunded. Obama didn’t want to do that. The Treasury Department then, as now, implemented extraordinary measures to enable the financing of the government to continue. On January 15^th, Fitch warned that delays in raising the debt ceiling could result in a formal review of the U.S.’s credit rating, possibly leading it to being downgraded from AAA.

This went on and on until October, when the government went into partial shutdown from October 1^st through October 16^th, when Republicans, who were mostly blamed for this, passed a continuing resolution to fund the government and, long story short, that was the end of that.

The chart below shows how the market performed during all of this in 2013. The S&P 500 soared 29% and bonds declined 2%. The bond decline had little to nothing to do with the debt ceiling. That was the year of the “taper tantrum” when bonds sold off on the unexpected announcement that the Fed would be slowing its bond purchases. In an echo of history, through 1/24/13 the S&P was up 4.8% year-to-date. Through 1/24/23 the S&P was up 4.3% year-to-date.

2011

Charlie Sheen was “winning,” Adele’s “Rolling in the Deep” topped the charts, and the last “Harry Potter” movie raked in the most at the theaters.

There was another debt ceiling crisis in 2011 that caused a bit more volatility. In that year, Republicans tied raising the debt ceiling to Obama implementing spending cuts. The ceiling was reached in May, with the Treasury implementing extraordinary procedures. An agreement was reached and signed into law on August 2^nd.

Despite this, on Friday August 5^th, S&P cut the U.S.’s credit rating from AAA to AA+, the first-ever downgrade for the U.S. Moody’s and Fitch kept the U.S. at AAA. Monday August 8^th was a pretty bad day on the stock market, with the S&P falling 6.7%. The Aggregate Bond Index held up fine on the flight to safety, rising 0.4%. So, there was a reaction in the market this time, but it was to the rating cut and it was extremely short-lived. It took the S&P 500 a couple weeks to recover from that day, but it finished the year flat. The Agg rose 7.8% in 2011. Here’s the chart:

The chart above looks ugly, but the short-term volatility doesn’t look bad in the slightly longer term. Here’s the chart for 2011-2013 showing the August selloff as just a dip in the road to solid gains:

The economy is incredibly complex and is not impacted long-term by political squabbles. Companies continue trying to make money and people continue to go about their lives and consume goods and services.  Past performance is not a guarantee for future performance, and we continue to believe in staying invested with an appropriately diversified portfolio for the long-term.