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.

CJM hosts Cozy Wittman, College Planning Expert, from College Inside Track. This past year has resulted in some of the most significant changes to the college planning process in decades.  We discuss the changes with Cozy during this webinar recorded on October 26, 2023.

Parker G. Trasborg:

Hi, I’m Parker Trasborg, senior financial advisor with CJM. Thanks for joining us today to learn a little bit more about the college process beyond just where and how much to save. I have three kids myself, many years off from college still, but I’m excited for today’s event. We’ll be, as I said, recording today’s program and posting it to YouTube, so if you have to leave early at all, you’ll still be able to catch the rest at a later time. If you have any questions at all, please utilize the Q&A feature at the bottom of Zoom and we’ll make sure to get those answered for you. Without further ado, it is my pleasure to introduce Cozy Wittman from College Inside Track. Cozy is the education and partnership leader at College Inside Track, and speaks nationally. She was, I think, in Texas recently and maybe California before that, about college search, educating families and training financial advisors and other professionals who work with families with high schoolers.

College search has become increasingly complex over the years with the nuances, very difficult to understand at times. Cozy is passionate about dispelling myths that cost families money. She was featured in the Journal of Financial Planning on the subject of college planning. Cozy is very excited to connect with organizations and families interested in learning more about the complex college search project. She’s a mom of five kids, pretty amazing, with very different goals for college, so she’s no stranger to the challenges around the college search. Cozy, thanks again for joining us and I’ll let you take it from here.

Cozy Wittman:

Thanks so much. Boy, five years into Zoom you would think I could remember how to unmute myself. Thanks so much for inviting me, it’s my pleasure to be here. I’m excited to work through some of the new and interesting nuances that are related to college, college search, and applications and acceptance. And so without further ado, we’ll dive right in. If you’re not familiar with College Inside Track, we’ve actually been helping families navigate the college search process for 17 years. Our goal is always the same, to make sure that families find right fit schools for their students. Right academic fit, right social fit, and right financial fit for your family. And then I’m assuming you joined today because you have a high schooler. I’m sure you already know that college search can be very stressful, and so part of our job through the process is just to try and reduce the stress associated with the college search process as well.

So we’re going to start today with a quiz, this is a play along at home kind of thing. As a percentage, how much do you think tuition has increased nationally at our public institutions? So these would be your state colleges and universities in the last 30 years, so since 1993. Do you think those prices have gone up 73%, 106%, 180% or 213%? So I’ll give you an opportunity to think about that for a second. Last 30 years average increase nationally for our public institutions. These schools have actually increased their tuition by 213%. By comparison, their private counterparts have gone up 415%. But before you get out your wet noodles and start lashing those private schools for that outrageous increase, I want you to take a quick peek at our flagship universities, so these are our major university in our states. I live in Minnesota, the University of Minnesota has gone up 570%. Our neighbors next door at University of Wisconsin have increased their tuition by 1047%. The highest I’ve found so far nationally is UConn at 1300%. Always like to give people a little state of the state of college land today. When I sit down and I chat college with families, which I do often, I ask the students, tell me some schools you’re kind of sort of interested in. And I will tell you candidly that your kids bubble up these top four, or something that sits in that same realm, as schools of interest. So I want to make sure that you can see the numbers here. But what I want to point out are these bottom three. The bottom three schools on this list are all flagship schools for their states. And you can see that the schools today ranging in that $30,000-$35,000, so when we think about public institutions it is rare that you get to dive in under $30,000 a year today. Your flagship universities, nationally we see them in the $30,000 to $35,000, as I mentioned. Of course, there are outliers, we have UC Berkeley sitting way out there at $39,000. But the others are catching up, and so I think it’s important to make sure that you’re saving and you are aligning your game plan for paying for school, for what prices actually look like today, and not like they looked like about a decade ago. We meet a lot of families that are hoping to pay $20,000 a year for a college education, and candidly, it just doesn’t look like that anymore.

All right, so here’s another quiz for you. I hope you did well on the first one. What percentage of students transfer at least one time? So number of kids who get off to their school and discover, “Oh my gosh, this is not the right place for me.” And need to change colleges. Is that 6%, 14%, 25%, 38%, or 42%? So today, the national transfer rate sits at 38%. 38%. Of the 38%, so almost 40% of kids who end up changing schools, the number of these kids who choose poorly the second time and have to change yet again is actually almost 42%. So huge number of kids not really thinking deeply about what they want in their college experience. And so here’s why I bring this up. When your student goes from one school to the next school, you have increased the cost of that degree by about $14,000. And for the 42% of kids who make a poor choice the second time and have to go to yet a third school, they are increasing the cost of their degree by about $24,000. So today, finding the right fit school the first time is super, super important, if one of the things that matters to you is keeping the cost of college down.

All right, so let’s talk a little bit about financial aid. The one thing that I always want to clear up here is helping families really understand what colleges mean when they talk about financial aid. So when you go out to a college website and you look for pricing, you’ll usually also find information that says something like, “Oh, here’s our sticker price, but the average student on our campus pays X. Or we give away X amount of financial aid.” And so I want to help you understand what that actually looks like because I find that when families talk about financial aid, what they really mean is need-based aid. So people will kick conversations off of me that say like, “Oh, we’re not going to get any financial aid.” And what they’re really referring to is need-based aid. So that’s one component of what financial aid is when the colleges talk about it, but it is not the only component. Colleges are also including merit-based scholarship dollars in those numbers, and they are including loans. And I don’t know about you guys, but I don’t think about loan as aid. Loans you have to pay back, it’s not a gift. And so when you look at the numbers on college websites and they tell you, “The average student on our campus pays X.” You have to know that their average student is going to include a student who’s getting need-based aid, who is getting some merit scholarship money and likely has taken out loans. And so if you don’t fall into any of these categories, or you only fall into one or two of them, the number they’re showing you is really irrelevant for your student. The other thing is, you’re not guaranteed the exact amount that the average student is getting of either need-based aid or merit-based aid. And so honestly, for the numbers that they show you on the college websites, we don’t really know if that’s what your student is going to pay. So we’re going to tackle these.

We’re going to cover today, need-based aid and merit-based aid. I have a whole entire presentation on loans. We are not going to cover those today. But I want to talk about the factors that actually do influence the overall cost to your family, and we’re going to kick this off by talking about need-based aid. So there are two forms that your family may fill out to determine if you have need. Most people are familiar with the first one of course, it is called the FAFSA. But lots of schools now also ask for something called the CSS Profile. It’s certainly not as prolific as the FAFSA, so you may never run into the CSS Profile, it just depends on the schools that your student ends up applying to. When you fill out your FAFSA form or you fill out the CSS profile, it creates through their formulas, a number that is now called the Student Aid Index. The Student Aid Index today is about 47% of your adjusted gross income. And I don’t know about you, but I didn’t plan to send almost half of my income off with my students to college. Parker mentioned we had five, so every time someone went to college, with the exception of the last one, there were always people left behind who love to do things like eating. So I’m not planning to send half of my income off. Here’s the deal, this is not a fair number. I just want us to all agree that the Student Aid Index is not going to be fair, it just is the formula.

So it’s important to understand how the formula works because what I find is that people start to do mental gymnastics around trying to be need-based. And the reality is you will either be need-based or you will not, and you can almost never jigger your way into that space. So on the FAFSA formula, student assets, because on the FAFSA students and parents are assessed, and you can’t really get out from underneath that, parent, there really is no way for you to extricate yourself from this. There are a few scenarios where a student can be independent. Most of you don’t want your kids to be in those scenarios. So here’s the deal, student assets on the FAFSA are assessed at a 20% rate, where your assets as the parent, only assessed at 5.64%. So when you look at where people save money for college, most people have their money hanging out in a 529 plan. That’s going to get this little teeny tiny assessment, 5.64%.

So if you have it in your head that somehow you’re being penalized for saving for school, just get rid of that thought because you’re not. Think about a 529 plan. What percentage of a 529 plan is intended to be used for college? A hundred. A hundred percent of that 529 plan, that’s what it’s for. Yet it is only getting this teeny tiny 5.64%. I do want to point out if you have your savings for college sitting in an UGMA or an UTMA form, or account, excuse me, it is assessed at that much higher rate of 20%. And so if that’s where your savings is hanging out, that’s okay. Just use it up first and that will impact the remainder of the years that you’re going to fill out that FAFSA. There are two big mistakes that we see that people make when they fill out their FAFSAs. The first is that they assume that assets are the influencing factor here. It is not. Your assets are only assessed at 5.64%, 5%. Your income, on the other hand, assessed at 47%. So your income, not your assets, are likely going to knock you out of the space of being need-based. The other thing that I find is that people put retirement accounts on their FAFSA. Your retirement accounts do not go on the FAFSA at all. If your advisor has suggested that you should have money sitting in a retirement account for your student and that’s going to be their college savings, that also does not go on the FAFSA at all. The other major asset that people have, of course, is their home, and that also does not belong on the FAFSA. Now, if you’re going to fill out a CSS Profile, if the college is asking you for one, you should know that both of those things go on the CSS Profile. So what people find is they are much less needy if they have to fill out that CSS Profile, but not your retirement, not your primary residence. Again, income is the single largest factor on the FAFSA. So stop doing the mental gymnastics, don’t run over to Parker and ask him to move assets around for you. You really can’t do anything on the asset side of the house to impact the FAFSA for the vast majority of people. Your income, unless you’re willing to quit your job and become a popper for the purposes of college, you also can’t do anything about that. And so from our perspective, you’re either need-based or you’re not. And if the answer is not, then we just set it aside. We stop thinking about it. And we focus on other ways to reduce the cost of college for you.

I do want to cover some of the big FAFSA changes. One of the things that does happen when people have two kids going off to college at one time, for us, in the house of five kids, I had six years where I had two people in college. And so there are some big impacts coming for families who have multiple kids in college, and I want to take you through some of the major FAFSA changes. I already mentioned the one, the outcome of the FAFSA is now called the Student Aid Index. If you have older students and you filled it out before you might be more familiar with the terminology Expected Family Contribution. That has been retired, so stop calling it that. I’m trying really hard to stop calling it that. Now, the outcome of the FAFSA is called the Student Aid Index. So again, big change for families that have multiple kids in college at the same time. The discount that was applied, or the leniency in the FAFSA formula that was applied for families who had two kids in college was closed down in the new FAFSA changes. So these are rolling out on the 2024 FAFSA. If you’re joining us today and you have a senior, the 2024 FAFSA should be available starting in December. They have not released the actual date though that the portal will open, so more to come there. On previous FAFSAs, the formula did take into account the fact that you might have multiple kids in college, and it adjusted accordingly. So the way the old formula worked is when you filled out your first student’s FAFSA and you told it, “I have two kids in college.” The formula adjusted and it said, “Okay, I’m only going to assess your income as a parent at 23.5% then. And here for student two, I will also assess your income at 23.5%.” So still 47% of your family income assumed available for college, but it got divided between your students. On the new FAFSA, that division disappears. There is no division. The formula will no longer take into account that you have multiple kids in college. So student A, you fill it out, your income assessed at 47%. Student B when you fill it out, your income assessed at 47%. So now the formula assumes that you can send 94% of your income off with your students to college. And God help you if you have three kids in college at the same time. More than a hundred percent of your income assumed available for college. It’s a ridiculous number. Clearly, when these changes got made, there was glaring misperception around how the FAFSA gets used, but also how expensive college is for families. There is also changes in the divorce formula. The way you will determine which parent fills out the FAFSA in a divorce scenario, because only one is going to, is by who is financially supporting the student more. So on previous FAFSAs you determined it by where the student lived. Try and erase that from your brain. It’s not about where the student lives. It’s also not about who claims a student as a dependent. That is irrelevant for the purposes of FAFSA. So whichever parent financially supports that student more, that is the parent that is going to fill out the FAFSA. This is self-reported. Do your best. Try and figure this piece out and then have that family fill out the FAFSA. The definition or the exemption, rather, for small businesses and farmers is also disappearing. So on previous FAFSAs, if you were a small business owner and you had fewer than a hundred employees, you did not need to include your assets on the FAFSA. Under the new FAFSA formula, you will need to include all of your assets regardless of the size of your business. This is true as well for farmers. And so know that it includes any unsold merchandise, any inventory, capital equipment, if you own the building, the value of the building. Same is true for farmers, land, capital equipment, all of those things need to be included now in the FAFSA.

And then one of the few shiny spots in the new FAFSA rules is that any third-party, I have grandparents here, but it could be anybody, it could be an aunt, it could be an uncle, it could be a godparent, it could be the neighbor next door who loves your kid so much and just wants to help them pay for college. Any of those people can now assist a student in paying for college, and the student will no longer need to report that as untaxed income. In previous years, that’s what happened. It ended up reducing need-based aid, and so they did close down that weirdness. And so now anybody who wants to help a student pay for college can do so. Feel free to start picking up the phone and calling grandma and grandpa.

Okay, let’s see if we have any questions. Parker, I know you’re fielding those. Anything so far pop into the-

Parker G. Trasborg:

Yeah, there was one around the cost of college. So you showed how the numbers have grown over the last several years. What do you expect the future for college cost to look like? And at what point do you think we reach a point where it’s maybe not sustainable anymore?

Cozy Wittman:

Yeah. So I’ll try my best to get out my crystal ball here. Here’s what I’ll say. Here’s what we see now. In COVID, there was a lot of discussion. There’s a cliff coming, not as many kids going to college, what are the colleges going to do? Parents were up in arms because they were paying $50,000 a year and my kid’s in my living room doing college. And so we were all quite sure that the college landscape was going to have to adjust. Many schools froze tuitions during that time, but guess what they’re doing now? This past year, 8% to 16% increases in college tuition. 8% to 16%. So in the very near future, I don’t see this changing. What will it look like 10 years from now? I don’t know, it’ll be interesting. There’s some interesting things starting to pop up on the landscape in the public college space. The state of Minnesota, where I live, just announced a program called the North Star Program. So if you, on your adjusted gross income for your FAFSA, if you are under $80,000 a year, tuition is free at our public institutions. You still have to pay for housing, but not tuition. We see things like that popping up in the state of New York. In the state of California, they’re creating basically a feeder and farm system, if you will, through their community colleges. Allowing kids to start there and auto transferring into any of the UC system schools. And so there’s a lot of creative thinking happening, and so I would say more to come here. But the schools that are losing out are the mid-tier schools. Those super selective schools, always going to be super selective because they’re always people who want to drive the Porsche. There will always be a market for that. Our public institutions are trying to be creative and fill their seats with people of all different styles. I think the schools that may suffer in the future are those mid-tier schools. We’ll see.

Parker G. Trasborg:

Thank you. Another one came in. Can you briefly address the impact of 529 plans owned by grandparents versus parents, and which one should be used first?

Cozy Wittman:

Yeah, so this is such a good question. Again, 529 plans only assessed at that teeny tiny 5.64%. So keep in mind that as a parent, your 529 plan, do the math. If you have $30,000 sitting in your 529 plan, multiply that by 5.64% and see the impact to your FAFSA. It’s nominal at best. So I’m not a big fan, if you have high schoolers, of suddenly jumping around and like, “Oh, let’s get grandma and grandpa to own the 529 plan now.” But rather, if both are there and hanging out, I would take advantage of both, because again, your 529 plan really not impacting. Even if you have $100,000 sitting in that, the impact to your need-based data is so minimal.

Your income, on the other hand, huge impact. But if you’re a family and you have a younger student, I met a family last night who has a 17-year-old and a five-year-old, it might make sense for grandma and grandpa to own the 529 plan for the five-year-old, and you contribute to theirs. But if you already have a high schooler, I’m not a big fan of trying to jiggle through some kind of something that makes sense, because remember, your income is so much larger impact here.

Parker G. Trasborg:

Thanks. Another one, is there an approximate income level where you could just not bother wasting your time filling out that FAFSA form?

Cozy Wittman:

This is such a good question too, and I get it every time. The short answer to that question is no, and here’s why. The FAFSA is more about determining need-based aid. There are other things that it gets used for, and one of the things we’ve seen in the last year are behavior changes from the colleges for families who did not fill out the FAFSA. So in previous years, we’ve always been kind of lukewarm like, “Yeah, if you’re not going to qualify for need-based aid or don’t fill out your FAFSA if that’s what you really want.” But in the last couple of years, we’ve actually seen acceptance behavior changes and financial package behavior changes on the parts of the colleges. So our recommendation to everybody today is fill out the FAFSA. Good news for you though, the new FAFSA, starting on the 2024 FAFSA, the questions go from 108 questions down to 40 or 46, depending on your financial structure. So it’s not such a huge suck of your time today. Fill it out. It is also, by the way, the application for the federal student loan. So if you want to take advantage of that loan program, you must fill out your FAFSA.

Parker G. Trasborg:

Another one. If this will be covered later, we can wait, but do you have recommendations for parents with GI Bill benefits and multiple kids on the doorstep of college? Is it better to allocate 100% of the GI Bill to the first one, or to spread it out across the kids to potentially maximize in-state tuition benefits?

Cozy Wittman:

Yeah, this is a good question. I would say it’s philosophical to your family. Figure out what works best for you. This is a really good question for your advisor at CJM. Go off, talk about how much you have. One of the things that we talk through when we work with families is, what’s the budget for college? And so thinking about what you have available to take advantage of, and then what is the strategic outlay of that? And so there’s so many other factors like, do you have other savings for college that filter in? The one thing I will say is that your GI benefits do not impact your FAFSA, so it wouldn’t be a, use it so then you get need-based aid later. That’s just not a thing, so I wouldn’t worry too much about it. And start to think philosophically, how many kids do we have? Do I want to layer this across my kids? Think about it that way instead.

Parker G. Trasborg:

Thank you. That’s all of them for now.

Cozy Wittman:

Awesome. All right, I have one last quiz for you. What school path do you think is the least expensive? Is it choosing a four-year public college? Is it starting at any two-year school and then transferring to a four-year school? Is it starting at a public college and then transferring to a private college? Or is it starting at and finishing at a four-year private university? I’ll give you a second here to choose your answer. And it turns out it’s a trick question, they all might be true. The real best, least expensive path for you, is based on who your student is and what circumstances do you have. There is no singular right least expensive path for every single student in every single state. So today, this is one of the things that just makes college hard to think about, is you really do have to evaluate all the pathways. And really think about, what is best for me?

And one of the things I’m going to offer here in a little bit is to do a free consultation for your family, where we can explore those pathways, if you want. But you have to explore them today because your circumstances, the way that your state thinks, and who your student is all impact the potential success of your student in college, not just financially, but actually from a success perspective as well. The one thing I am going to say, and we talked about this earlier, starting at any college and transferring to any other college is probably going to be more expensive. So it’s an important thing to keep in mind, when you change schools, usually dollars go up. When kids change schools they’re usually in school longer, on average about eight months, and so you’re still paying for school but not earning. And so just keep that in mind.

Today, it’s time to really ditch old world thinking. It does not suit the college environment any longer. So if you’re thinking, started the two-year community college, changed to the local public institution, automatically cheaper. Nope, it might not be. Started our public four-year and finished at the public four-year, cheaper. Nope, it might not be. Today, you really need to think about schools as flexibly priced and inflexibly priced because there are schools in the country, thousands of them, who will make it less expensive for you because they want to fill their chairs.

So when we look at my five kids, I’m going to take the top two off, they were very non-traditional. One of my kids didn’t go to college, by the way, so I’m not a college bigot. Of the bottom three, one went to our public flagship university, one went to a private university, and one went to an out-of-state state school. It wasn’t the flagship school of the state, but it was a state school in another state. Of those three, the out-of-state state school, the private, and our local flagship, the most expensive of those three, our local flagship university, the University of Minnesota. The least expensive of those three, the private school. My daughter went for the same price as one of our smaller state schools. So today you really do have to investigate, understand gifting programs, understand how colleges think. And I’m going to tip you in here to how colleges think. Why think about them as flexibly priced and inflexibly priced? Because there are public and private schools in both of those categories. In both.

So let’s talk about scholarships because this is what people want to talk about. Where do we find scholarships? And I think you’re going to be surprised at the answer. We’re going to talk about where money comes from, from the highest rate of return for your investment of time, down to lowest rate of return for your investment of time. And the number one place you find scholarship dollars are the colleges themselves. Schools give away millions of dollars every single year. For our class of 2022, those kids garnered more than $23 million in scholarships from the colleges they applied to. 23 million. This is where the money hangs out. So we are not big fans of molding your kids into something that colleges are interested in, but rather the other way around. Figuring out, here’s who my student is, and here are schools that would be interested in them for acceptance purposes, but also for potential scholarships. When colleges give away money, it does typically last all four years. Colleges are also number two on the list, so after your student gets accepted they get a package, but they also get an email that says, “Congrats, you’re a bear, a beaver, a gopher, a duck.” Or some other woodland creature. And in that email, there’s a link to additional scholarship dollars. Why do kids miss this? Because it wasn’t text to them. They’re not email readers yet, they aren’t business thinkers yet, and so they aren’t looking in their email for scholarship opportunities. They just aren’t. If the colleges would send these via TikTok or text, they’d get it in a heartbeat. But they don’t, and so consequently, by the time the kids get around to reading these emails, the deadlines for a lot of these scholarships have passed and they’ve missed that money. So making sure your kids are on top of it after they send their applications out the door is important. Local scholarships are number three. So you’ll notice our pyramids getting smaller. Local scholarships would be things like your employer, a local bank, maybe a community club like Lions. Any of those organizations give away money. Does it move the needle of college? Not very much. Congrats, here’s $200, here’s $500, here’s $700. Your student might manage to scrape up a thousand bucks here. If they’re going off to your local flagship at $33,000 a year, it just doesn’t make that big a difference. It just isn’t really impacting. Congrats, you bought books. So are these okay? Sure. Should they apply? Sure. Just don’t count on them to actually reduce the cost of college by very much. And the other thing here is the local scholarships do tend to be one-shot deals. So you get it once and then they don’t get it again. And then bottom of the barrel, where I would suggest you spend exactly zero amounts of time, is out on the internet looking for private scholarship dollars. These will be a waste of your time. The average student has to apply to between 55 of these and 80 to win anything. And the average award amount here is about 500 bucks. $500. They would be better off just getting a job the summer before they go off to college. They’ll earn more.

All right, so if schools are your source, what are the schools looking for and what should you be thinking about? Well, the first thing you have to know is, does the school actually even offer merit aid? Not all schools do. Why? Because not all schools have to. If I’m a college or a university that has a 4% acceptance rate, 7% acceptance rate, 13% acceptance rate, 18% acceptance rate, I don’t have to give away money. Kids are bashing down the doors to get into my university. There is no money available at those very selective colleges in this country. And I know everybody knows somebody who got a full ride. That kid is urban legend. That kid is not real. Now, you might know somebody who got significant money, but guess what? It wasn’t scholarship dollars, it was need-based money. So a lot of those schools cover a big chunk of need, they do not give scholarship dollars because everybody’s smart who gets in there. Who would they give it to? So here’s the other thing, colleges are businesses. And at the end of the day, they are incentivized the same way businesses are incentivized. And if I don’t have to give away money, why would I? So first you need to know, does the school offer merit aid? The second thing you need to understand then is, what are they giving it for if they’re going to give it away? At the end of the day, schools have a bunch of open chairs, and they need to fill those chairs with kids that benefit them. Again, they’re businesses. No one’s looking at the admissions, all the applications and going, “That Jane, we’ve just got to have her on our campus.” That’s how kids think about college, but it’s not how the colleges think. So they’re looking for kids who help them with their average GPA and their average test score. So in looking for schools, you want to look for schools where your students’ numbers are above the incoming average for that college. It does not mean your kid has to be a four point student, you just need to look for schools where they’re riding above the incoming average kid for that college. Extracurricular talents matter, but more is not better here. Quality of activities is better. And doing a really good job of showcasing, kids are classic undersells, so showcasing the things that you’ve done on that application matters. And then be demographically interesting. This is super easy to do, and most of us cut ourselves off from it. I did for sure. I told my kids, “Stay in the state of Minnesota, go to a state school.” Until I learned better. You are more interesting outside of your state than you are inside of your state, and that brings extra scholarship dollars to the table, believe it or not. All schools want to say that they’ve got 50 kids, one from every state in the country, and they’ve got 37 countries represented. So this is where it’s important to think outside the box. It will benefit you.

All right, let’s take a look at a recipe card for how colleges think. This is one school’s recipe, but these categories are extremely common, so I want to help you understand how the colleges are thinking. Demonstrated interest is a category of scholarship dollars that people don’t even know exists.This is the school’s perception that your student’s pretty interested in that. So the interaction with the school matters. Following their social media, touring, this stuff is easy to do, you just got to do it. Look at this, for living out of state the school’s bringing a lot of dollars to the table for the kids they hardly ever see. This is pretty common practice in the private space, you don’t see it as often in the public space. For every A on the transcript. Again, these next few categories, they’re buying the strongest students they can find. So for every A on the transcript, $62, for rigorous classes, $400 per, an excellent letter of recommendation, 1,800 bucks. And for every point above this school’s average score that your student’s ACT score is, they’re giving 425 per point. So I think it’s important to keep in mind, the schools are looking for kids who are going to be successful on their campus.

And so the decisions you are making right now, while your students are in high school, are actually building the scholarship package that they’re going to get. And that’s why the high school years are so important and it’s important to make good decisions. Just for filling out your FAFSA form, so this goes back to the question you asked me earlier, does it matter if we fill out our FAFSA form if we’re not going to get need-based aid? We would argue yes because there are a lot of schools, one, who will just hold onto your financial award package until they see your FAFSA. And two, there are schools that actually add scholarship dollars just because you filled out your FAFSA. And then a really well-written essay can be worth quite a bit of money. The essay is not a check the box moment anymore, it is an opportunity for the student to increase likelihood of acceptance, and increase likelihood of higher scholarship dollars. We spend a ton of time with our kids on their essays because it matters.

All right, my second tip for you, testing still matters. Do not think that the test optional landscape means that schools don’t care about the test. Today, the schools see the two tests, the ACT and the SAT, as equal tests. There is no distinction from the college’s point of view. So long gone are the days where if you were going to East Coast you had to do an SAT, if you’re going to the middle of the country, ACT. You can take any test you want. And the good news is the kids can take the test that benefits them most because they’re different. The other thing is the PSAT is digital starting this fall, the SAT is going to be digital after the first of the year. So if you’re looking at the SAT, just know that it’s going to be digital and you should get appropriate test prep. The test is going to work really differently than the old fill in the bubble test, and so it’s important, if you’re looking at test prep, to make sure you’re getting the right test prep for the test you’re about to take. So if you’re going to take the SAT, make sure you’re looking at test prep companies who do digital training for test prep. And then after you get a couple of rounds of your tests, then you can decide whether or not you’re going to send it off. Both tests, when you register for them, prompt you to put in schools. Don’t do that. Hold off, wait and see if your student has a test score that you actually want to send because you might find yourself in the position where you send it to these three schools, but you don’t send it to these two. So just keep that in mind. Hold off until you know.

All right, I’m going to take another round of questions if there are any, Parker, before we dive into trends in the last two tips.

Parker G. Trasborg:

None in here so far. I’ll give it a second or so to see if we have any pop up.

Cozy Wittman:

Sure, sure. Good.

Parker G. Trasborg:

Yeah, nothing. If anything comes up I’ll ping you.

Cozy Wittman:

Yeah, sounds good. So let’s talk about some of the trends that are impacting the actual cost of college. I mentioned the test optional landscape before, test optional started as a kind of courtesy or something that was needed, because candidly, the test sites were closed during COVID. There was nobody taking tests. And that, in some states, stuck around for quite a while. But guess what the schools learned during COVID? They learned that when they go test optional, they get more applicants. And so what started as kind of a courtesy has now transitioned into a marketing plan. So as long as I stay test optional as a school, I can still accept kids who are submitting test scores at higher rates, and we see that behavior on a pretty regular basis. But I know that it’s going to drive more applicants. And guess what? Colleges love applications. Why do they love them? The more applications they get, the lower their acceptance rates are, because they’re not changing the size of their freshman class. So the more applications drives down my acceptance rate, I look more selective. And guess what happens when I look more selective? I don’t have to give away money anymore. I get to keep my endowment. So keep in mind that the colleges are all about the colleges. They are making decisions in their best interest, so I want you to make decisions in your best interest. This huge shift in volume, 30% increase in application numbers since 2020 in the last three years. Year over year, a school might see a one to 2% increase in their applications, one to 2%. And we are seeing, in the top tier schools, anywhere from 26% to 37% increases in application numbers. And then in all other tiers, about an 18% increase.

So there’s a huge drive in this application space. The volume of applications is driving decisions the colleges are making and the behaviors that they are using to make decisions. So one of the things we’ve seen as schools shift over into way more application numbers, is they are taking a higher percentage at some schools, a higher percentage of their freshmen classes out of early decision candidates. Why does this impact the cost of college? Because if you put all your eggs in a single basket and you say to a school, “I love you so much, I’m going to apply early decision. And if you let me in, I’m coming. And I’m going to withdraw all my other applications and I’m coming to you.” You’ve lost all your leverage. They’re not worried about losing you anymore. And so consequently, what you see is if you were going to get scholarship dollars, they now disappear because the college doesn’t have to gift them to you anymore. You’ve told them you’re coming.

The other thing we see as application numbers rise, is that students just need to do more to get in. In tier one and tier two schools, so these would be schools who have acceptance rates under 30%, we see students now needing to do extra projects, passion projects, research projects, something like that. Secondary factors continue to influence acceptance rates. They also, obviously, I just showed you, how they increase scholarship dollars. These are things like demonstrated interest, the rigor level of the student’s transcript, the essay, all of those things impacting acceptance. But they also impact in a really positive way for your family, the cost of college because they bring better scholarship money to the table. And then the last thing I just want to point out is that at some schools pricing is better, but I just mentioned eight to 16% increases in tuition.

So while we thought pricing might level out, it doesn’t appear to be doing so anytime soon. That does not mean there aren’t great deals to be had in college, there are. But again, I just want to point out, most people paying over $30,000 a year for a college education. All right, tip three, make college more of a business decision. I already mentioned the colleges are thinking about it that way. They are acting in their own best interest, and you should be too as parents and as the student. So diving deeper, don’t let your kid make a decision based off cool campus, great dorms, and I love the sports teams on this campus. Instead, take them deeper, assure the school teaches like your student likes to learn. Make sure there are multiple majors available on this campus so they can change their mind without having to change their school.

And then those big brand schools, I’ve mentioned this a couple times, I can’t say it enough because I meet with families every single day, they’ve got this super sharp kid, 36 on the ACT, 4.9 GPA, nothing more though. And they think that’s enough to get into the Johns Hopkins of the planet, the MITs of the planet. It just isn’t. It isn’t today. You’ve got to have a passion project, a research project. It might be an internship. You’ve got to have something more than just being smart.

And then my last tip for you today is, create a family philosophy around paying for college. What do I mean by that? You need to create your four-year game plan for paying for school. What does that look like? And in that game plan, actually play out, where is money coming from for all four years? Define expectations for everybody. So if grandma has a 529 plan, but you have no idea how much money is sitting in it, it’s time to have that conversation. “Grandma, I’m trying to figure out my budget for college, tell me how much is hanging out there so I have an understanding of what we can afford.” Same with your own 529 plan, if you want your student to have some skin in the game, you should have that conversation now. Start to lay out expectations. This is what we would anticipate you will be paying. And then talk about it early in the process. Why is this the case? Because one of the biggest mistakes we see that people make is they go and they tour the Porsche when what they want to pay for is the Chevy Malibu. So it’s important to understand, does the school gift? If not, can I afford the $78,000 price tag that comes with it? And if the answer to that question is no, don’t go tour that school. Because of course your student’s going to fall in love with that school. Of course they are. So start to define expectations, and if you have no understanding of how to do this, great conversation to have with your advisor.

It is also a conversation we would have in our consultation.

So a little bit about us and then I’ll take your final questions. College is an industry just like anything. Just like real estate, investing. There are things you need to know to do it well, you’re going to do this a couple of times. We sent 200 kids off last year to college. You can do it on your own, but lots and lots of families do leave money on the table. So part of our responsibility is to help you get through this. Help you understand what you should know and when you should know it, so that you can make good decisions. That national transfer rate of 38% drops to less than 4% when we work with families. We do ensure you get the best prices for the schools on your list. We also make sure that the schools that make it to the list meet your budget. And then we get to be a neutral third-party. This is my favorite thing that we do. I have five kids, four are girls. They have all mastered the eyeball role, and I never get to be the smartest person in the room. Never. I’m sure you’ve had that experience or maybe you haven’t, maybe your kids are kinder than mine. But just know that we get to be that neutral third-party.

So here’s the coolest thing I want to offer to do for anybody who’s on today. I do free consultations. I do them every single day. I love it. It is bar none my favorite thing to do. I love sitting down and chatting college with people. We’re going to sit down, you’re going to include your student, and we’re going to get questions answered. You bring all of your college related questions to the table and we’re going to talk about those. We will discuss goals in those three key categories, academic fit, social fit, financial fit. And I’ll give you strategies. These were great tips. They don’t fit for every single family though, so let’s chat about your specifics. I can give you a rough of the outcome of your FAFSA, so that you’ll know, am I going to be need-based or not? And if the answer is no, then we’ll talk about how you really maximize opportunities for scholarships at the colleges. So a little bit of housekeeping, I have a Google form that I’m going to drop into the chat here shortly, I will also send it off to Parker.

If you have a sophomore or junior, take advantage of the consultation. It’s free. I’m happy to sit down with you. It is bar none. I got into this to make a difference in people’s lives. That’s what I want to do. So feel free to take advantage of that. If you join today and you have a young student, you’re like, “Oh, Cozy, they are not ready to talk college.” That’s okay. Fill out the form anyway, we’ll reach out during sophomore year. Second half of sophomore year most kids should be starting to think about this. And then feel free to follow us on Facebook, we put a ton of content on our Facebook page. It’s just College Inside Track on Facebook. And then share us with people you know. If you have high schoolers, I know you know people with high schoolers, so many families stressed out, and so many students stressed out. I really want families to understand what the landscape looks like, so that you can make really good decisions for your students. Any questions, Parker?

Parker G. Trasborg:

None, again, at the moment.

Cozy Wittman:

All right.

Parker G. Trasborg:

We’ll see here in a second or two. But Cozy, thank you so much for joining us today and for all the great information and your time. Thank you everyone for joining us today, it was really neat to see people from all over the country, I see a family out in Washington, some people down in Texas. So good information for everyone and glad we’re able to bring you a virtual event so you can join in on the fun. If you have any questions beyond what we’ve talked about today, feel free to reach out to your planner directly, or as Cozy mentioned, we can reach out to her and she will help get those answered. That is all for today. Again, thank you all for joining us and I wish you all the best as we head into the holiday season. Thanks.

Cozy Wittman:

Thanks for having me. Take care.

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.

Parker G. Trasborg, CFP®, hosts Cozy Wittman to discuss how to plan for college.

Parker G. Trasborg:

Hi, I am Parker Trasborg, Senior Financial Adviser with CJM Wealth Advisers. Today I’ve got Cozy Wittman from College Inside Track. College Inside Track helps families navigate the complicated college process. We are actually hosting Cozy on Thursday, October 26th at 12:00 Eastern for a Zoom webinar, which will go into a bit more details beyond what we’re talking about today. So a little promotional video here for the event later on.

Cozy, thank you for joining us. Let me start off with just a quick question. I had heard that colleges are no longer necessarily requiring tests and it’s test-optional now. Can you tell us a little bit more about that real quick?

Cozy Wittman:

Yeah, for sure. Thanks for having me, Parker, and I’m excited to partner with you later in October. For sure, the test-optional landscape has been around for quite a while. Pre-COVID, there were more than a thousand schools who were test optional. And what test optional really means is that it’s up to the student whether or not they would like to submit their test. It does not necessarily mean that the schools don’t care about the test. And that’s a distinction that I want to make.

After COVID though, when COVID hit test sites shut down, and so about 800 more schools in the country jumped into the test-optional space simply because people could not get tests. But what we’ve seen as COVID has receded and things have started to return to normal is that a lot of the schools are remaining test optional. Now, some have gone back to test required. We see that in some public institutions, for instance, in the state of Florida and the state of Georgia and the state of Indiana. But a lot of schools are remaining test optional because one of the things they’ve noticed is that test optional becomes a marketing engine for them and it helps increase their overall applications.

And in our webinar together, we’ll talk about the implications of that. But the thing that I just want people to know is the landscape is not as clear as these schools require a test and these simply do not because there’s no question that behind the scenes we are still seeing students get accepted at higher rates who have test scores to submit.

Parker G. Trasborg:

That’s interesting. It’s definitely another place that things have changed over the last couple of years with COVID. So where would you kind of recommend that people look to find scholarships for their kids heading off to college?

Cozy Wittman:

Yeah, for sure. So scholarships are the number one question that I get asked when I sit down and chat college with families. The number one source of scholarship dollars are the schools. And if we want to merge our two topics together of test optional and scholarships, one of the things that we’ll see in the test-optional schools is even if they are test optional for acceptance, they are still tying those test scores to scholarship dollars.

So when you think of the overarching landscape about where scholarships come from, the number one source of scholarships are the colleges themselves. There are a lot of reasons schools give away money, and we’ll break down the specific categories for what they give money away for in our webinar together. But in general, what I want people to know is there’s no magic rainbow of scholarships that you are somehow missing out on because you just don’t know where to tap into them.

The place that you tap into those scholarship dollars are the colleges, right? How your student makes decisions in high school is building a scholarship package. How they present themselves in their application process is helping build your scholarship package so that by the time you apply to schools, the schools then will just apply the scholarships based on what they see happened during your high school timeframe, which is why it’s so important for people to start to think about college search as early as sophomore year because those decision processes along the pathway are building that.

Parker G. Trasborg:

Interesting. So definitely a lot there and much, much more to cover, which I look forward to doing here in just a few more weeks on October 26th. Cozy, thank you again so much for joining us today, and again, we look forward to having you join us again in a couple of weeks for a more extensive, about hour-long webinar that we’re planning to do. Again, thank you very much and I’ll talk to you soon.

Cozy Wittman:

Yeah, sounds good. Thanks, Parker.

Parker G. Trasborg:

You’re welcome.

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.

Tracey and Griff discuss things that you should think about to try to avoid becoming a victim of a financial scam.

Griffin:

Hello, my name is Griffin Baker, Financial Adviser here at CJM Wealth Advisers. I am joined here today by Tracey Baker who is not only the President and Chief Compliance Officer of CJM Wealth Advisers, but also happens to be my mother. We, along with the rest of the planning team, often get phone calls and emails from clients and how they recently were scammed and we want to try to have a discussion here today to hopefully empower individuals to avoid being scammed in the future. Recently, the Social Security Administration and Federal Trade Commission declared March 9th Slam the Scam Day in an effort to increase financial scam awareness and what to do in the event that you are scammed. With that being said, I want to turn it over to Tracey to share some ways to determine if a communication is in fact a scam.

Tracey:

Thanks, Griff. Yeah, we get almost inundated with stories from clients of contacts that they’ve had that from sometimes government authorities, social security, or they go and file their taxes and find that in fact, someone has filed their taxes for them and already received their refund. There are four basic things that all scams share. And so, just remember the four Ps. The first P is pretend. They’ll pretend to be an authority, either it’s social security, it’s the IRS. It can be a medical thing, or it can be a group that gives a prize, publishers clearing house, those kind of things, the lottery. So, the first thing is they’re pretending to be something else. Second P is kind of a combination. They’ll either put pressure on you to pay something or to win a prize. They’ll tell you you’ve won something, but you’ve got to give information so they can send you money and they want to get your bank account information.

The third is that they pressure you, and that’s probably the most important thing. If someone contacts you and puts pressure on you to act immediately regarding something, you can’t get off the phone, you can’t call them back, you can’t reach out to your family members, that is often a sign that it’s a scam. And lastly, it’s they’ll ask for payment. Even some of the ones with prizes will say, “You need to send us money so we can verify your account and then we’ll send your money back.” Or they’ll ask you to pay them in the form of a gift card. No government agency is asking you to send them gift cards, but that’s an unregulated way for them to receive money. So if you can remember those Ps, you should be in good shape with avoiding that.

Griffin:

That’s good to have four kind of main types of scams to look out for and hopefully recognize in future communications. With that, are there preventative ways that you can kind of get ahead so that you aren’t scammed to begin with?

Tracey:

Well, it’s a good question. One of the things that we always tell people is to be very mindful of when someone reaches out to you. If there’s a link or it’s something that you don’t recognize, just don’t open it. There are programs that if you open a link will allow the scam artists to get into your computer and even access your emails. So, when they do that, then they can then email other people saying they’re you. That’s one important way to avoid it. And then also, just catch a breath. Take a minute. Government agencies are not just going to dial you up and start telling you that your social security has been compromised or you owe money to the IRS. That’s not how it works.

Government agencies reach out via letter usually if there’s an issue or a question or problem. So, I would say if you receive a call, just take a minute. You don’t give them any information, just even hang up on them. You can turn around the call, you won’t get in trouble. That’s probably the most important thing. And then lastly, you can’t rely on your caller ID because these folks are so smart. They are able to log in and mimic through caller ID, government agencies or the FBI or those kind of things. So, be mindful of that. You can hang up, don’t worry. You’re not going to get in trouble.

Griffin:

Now, for email communications, something I recommend to folks is to go to the website directly rather than clicking on any links that are embedded in the email to hopefully avoid any kind of malware being downloaded or anything like that.

Tracey:

Right. That’s great advice. That’s great advice. Yeah. You just want to be very mindful of that and only open things from people that you actually know.

Griffin:

Well, I hope all of you listening are taking notes and want to partner with us to slam the scam. Hopefully, some of these tools can be used for future communications and stuff like, to hopefully give you peace of mind that you’re not actually getting some terrible things from the IRS or whatever it may be.

Tracey:

And one of the smartest things that you know can do is go out and change your password on your email address. That’s-

Griffin:

That’s right.

Tracey:

…the one of the easiest things and you do a complicated password. It can be a sentence, just something that you’ll remember. And then that is the best way. I know I did mine last week, and I think everybody is trying to be very mindful of protecting your data and your information.

Griffin:

Very true. With that, I hope you all stay safe and take care.

Tracey:

Thank you, Griff.

Griffin:

Thank you.

Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss what happened in markets in 2022 and our thoughts looking ahead in 2023.

Parker:

Hi, I’m Parker Trasborg, Senior Financial Adviser at CJM Wealth Advisers, and today I’ve got with me Kevin Donovan, our Portfolio Research Director. Happy New Year, everyone. Thank you for joining us for our first quarter update of 2023.

Kevin, 2022, as we all know, was a very rough year for markets, both stocks and bonds. According to Vanguard, that we listened to the other day, it was the first time since Alexander Hamilton was the Treasury Secretary that both stocks and bonds were down double digits in the year. Can you tell us a little bit about what happened last year?

Kevin:

Yeah. I can’t tell you much about the 1800s, but last year the story basically was all about inflation and the Fed’s efforts to fight inflation. Inflation spiked to levels we haven’t seen since the early 1980s, and the Fed, in order to fight that, raised interest rates very, very aggressively. So we went from interest rates at about zero at the beginning of the year to over 4% by the end of the year. That’s an incredibly steep interest rate increase, and it just wrecked havoc with stock prices and bond prices throughout the year.

I have a couple charts to show you just how it looked, so why don’t we put those up right now? The purple line on the chart is the S&P 500, and you can see that fell by over 19% last year. Now, the S&P had been the best performing index for several years in a row, because tech stocks were on fire, and the S&P 500, its biggest components are the large technology stocks. But last year that all flipped around, and tech stocks had a really tough year, and the S&P was the worst performing major index. The Dow Jones Industrial Average, the orange line, didn’t do too badly compared with the S&P 500, it was down only 8.8%. International stocks were down by more throughout most of the year, and then in December they really came back. But they finished better than the S&P 500, but much worse than the Dow, they were down about 16.8%. Bonds, as you can see, the green line, was down 13%, the bond index there. That’s the worst performance in its history.

But if we look to the fourth quarter, you can see there was much different picture during the fourth quarter, where all these indexes that were significantly negative throughout the year, were positive in the fourth quarter. We saw an easing of inflation, inflation came off of its peak, so that provided some confidence that maybe the Fed effort to fight the high inflation is working. The S&P rose by 7%. But if you look at the Dow, it was more than double the S&P 500 return, it improved by 15%. International stocks were even higher than that, they jumped 17% as the dollar weakened, which helped the international stocks. And bonds rose about 2%, so pretty good showing for bonds in the fourth quarter.

This shows that the market began heading in the right direction, but you can see that, I mean, for the year, things were so negative that we still have those double digit declines all around and there are still risks ahead.

Parker:

Yeah, inflation was the big story all throughout 2022. We have seen that start to ease up a little bit this year. Pulling out your crystal ball, what are we seeing for 2023?

Kevin:

Well, the crystal ball is cloudy for stocks. Inflation has come off of its peak, but it’s still about 6.5% right now. So prices are still rising, they’re just rising at a lesser amount than they have been say over the summer when inflation peaked. That increases costs for companies and increases prices for consumers, as everyone knows, which could have an impact on stock valuations going forward.

In the past, when the Fed has raised rates so dramatically, so quickly, they’ve overshot and have pushed the economy into a recession. So by creating tight monetary conditions, consumers stop buying and the economy goes into a recession. Whether or not that’s going to happen this year, we don’t know, the risk is there. And if we do see a recession, that could have a negative impact on stock prices. If the Fed does stick the landing, that would be great for stocks. There’s both sides there, so the picture is cloudy.

On the fixed income side, we’re seeing a lot of optimism among our mutual fund partners on the fixed income side, so on bonds. I’ve talked to American Funds, Fidelity, we saw something from Vanguard just the other day, you and I, Parker, and they’re very positive on bonds going forward. There was a lot of pain last year in bond prices, but as the Fed begins to reduce the rate that their increasing interest rates, so they had several quarters, or several months in a row where they raised rates by three quarters of a percentage point, in December they reduced that to 50, or half a percentage point. The expectation is for the next time they do it, it’ll be a quarter of a percentage point, and that is good for bonds.

Because of all that pain, right now bonds are paying a higher yield than they have since the great financial crisis, so that’s over 15 years ago. Now you can buy a one-year treasury bill, the safest investment out there, that’s going to pay you more than 4% on an annual basis, and that’s good income for bonds. Traditionally, you would hold bonds for the stability, they’re not as volatile as stocks, but also for income. That income component hasn’t been there for over a decade, and now it’s finally back.

Parker:

Yeah. And if we do hit a recessionary patch, then the Federal Reserve might even have to shift gears and start to cut rates, which then would give us an opportunity in bonds to see some price appreciation, the opposite of what we saw last year.

Kevin:

Right, it’s a good point.

Parker:

Kevin…

Kevin:

Sure.

Parker:

Yep, go ahead.

Kevin:

I was just going to say that, yeah, recession is bad for stocks, but it’s actually good for bonds, because the Fed has to cut the rates and that makes bond prices go higher. So good point.

Parker:

So we’re definitely feeling much more bullish on bonds. Not a very exciting asset class in general, but looking forward to what we may see here in 2023 from bonds.

Kevin, thank you for joining us, that’s all the time we have for today. If anyone has any specific questions, feel free to reach out to your planner, or to Kevin directly, Kevin likes hearing from clients from time to time.

Kevin:

That’s right.

Parker:

Thank you all for joining us. Happy New Year again, wish you all the best, and we will see you next time. Bye-bye.

Kevin:

Thank you.

Jessica R. Ness, CFP® and Parker G. Trasborg, CFP® discuss inflation’s impact on 2023 retirement plan contribution limits.

Jess: Hello, I’m Jessica Ness, Senior Vice President and one of the Partners at CJM and joining me today is Parker Trasborg, Senior Financial Adviser.  Thanks for being here.

Parker: Thank you, Jess.

Jess: 2022 has seen stubbornly high inflation with the consumer price index (CPI) rising at the fastest rate since the 1980s peaking at a 9.1% year over year increase this past June. Many of our client conversations this year have touched on inflation, and how it has impacted them at the grocery store and beyond. The higher inflation has lead the Federal Reserve to increase interest rates to try to slow it down which ultimately has caused both stock and bond markets to have a difficult year so far.  With all of the negative market news, Parker, is there is a positive from recent high inflation?

Parker: Yes, a little bit, Jess.  The positive is being able to save more in a tax-advantaged way, thus potentially saving more over time. Contribution limits to work retirement plans are tied to inflation and the IRS announced some big bumps to how much you are able to contribution to these plans in 2023.  As you can see here for 401(k)s, 403(b)s, most 457 plans and the Federal TSP plan, the limit is increasing from $20,500 in 2022 to $22,500 in 2023.  If you are 50 or older, the catch-up contribution is also increasing from $6,500 to $7,500.  This means that someone age 50 or older can save up to $30,000 in 2023 into their work retirement plan.

Jess: That is definitely a big jump and a good amount that the IRS lets you save each year.

Parker: It certainly is, there is one big thing to be aware of when updating your contributions.  Depending on your employer match, you may want to make sure that you have your contributions set-up to hit the maximum amount through the whole year rather than front-loading it early in the year.  For instance, if your work will match up to 4% of your contribution amount but you choose to contribute 15% and hit the maximum in August, you may miss out on 4 months of a potential match because you won’t have contributions going into the plan for September, October, November or December and thus nothing for your employer to match unless they offer what’s called a “true-up”.  So you are better off setting your contribution amount to a lower percentage to try to max out the plan in December to receive the full employer match throughout the year.

Jess: Great point, Parker, and something everyone should be aware of as they are setting up their contribution amount to avoid missing out on “free” money from your employer.  Similar to work plans, IRA and Roth IRA contributions are also increasing in 2023 from $6,000 to $6,500.  The catch-up contribution for those 50 and older is not tied to inflation and will remain at $1,000 for the year.

Parker: So a bump there as well, and the IRS has also bumped the income limits to be able to contribute to a Roth IRA for 2023.

Jess: Right, so if you were right on the edge this year and don’t find yourself receiving a pay bump equivalent to the inflation jump, you may be eligible to contribute to a Roth IRA in 2023.

Parker: Really great to be aware of and since the IRS allows you to contribute to an IRA up until April of the following year, you could wait until early 2024 to see where your income settles and decide to make a contribution at that time for 2023.

Jess: It’s nice that the IRS gives times to calculate your taxes before making a contribution, just don’t forget to do so. Now, there’s one other area that we wanted to hit on today that is seeing an inflation increase in the amount that you can contribute to next year.

Parker: Health Savings Accounts or HSAs.  For those eligible and are contributing to an HSA, the limits are going up to $3,850 for single and $7,750 for family coverage in 2023.  The catch-up contribution for those that are 55 and above will remain at $1,000.

Jess: Thanks Parker, these are all good tips and great ways to try to reduce your taxable income while also saving for the future.  If you have any specific questions or concerns, please reach out to your planner.  We are CJM Wealth Advisers and in a world of right now, we plan for what’s ahead.