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Alchanati Campbell & Associates
Dear Climber,
The economy should expect a slowdown in 2019. Interest rates are high, real estate prices are slowly declining, inflation is rising and the 10-year T-bond and 90-day T-bond are getting closer to an inversion. Based on history and fundamentals, we are in the last stage of the economic cycle: the tightening stage. But why does the economy look so strong? The market moves on information. With the current political climate and transformation in information technology, tweets and informal speeches have been moving the market in swings. It wouldn’t be improbable that market manipulation is occurring, but that just makes finance more interesting. The Market. Rising interest rates have caused listings to sit longer on the market. The average 30-year fixed rate mortgage rate was 4.74% in November 2018 (November 2017 rate equaling 3.82%). With higher interest rates, people have to lower their home price target to be able to afford a new home. The bond market offers predictive information about future economic growth and inflation. The Treasury Bond rate has stayed low at around 2.69% while the Fed has been raising the Fed Funds rate. The bond market’s fundamentals are indicating that the nominal growth in the US economy (GDP) will drop from its 2018 levels. Home sales are expected to continue on a downward trend in the next 12-months with the increase in mortgage interest rates. Why do we care so much about having the “best”? Some people are after the best, and some are satisfied with good enough. But looking for the best can be extremely counterproductive. Choices are about making us feel good, about getting us to some other thing that we want, or it’s to help us make statements to the world about who we are. What you choose is saying something about who you are. Large choice sets induce people to regard the choices they make as statements about the self. People who are out to get the best do much more social comparison than other people. The solution: sometimes ‘good enough’ is indeed good enough. What I’ve learned from attending one of the best Yeshivas in Israel. One of the greatest challenges of this world is to appreciate and enjoy what we ourselves have- even though there are others who have more. It is not so much death that is good, but our awareness of death’s certainty that is good. Not knowing when we’ll die creates, if we allow it to, a very real and healthy sense of urgency to get on with life. The purpose of this world is choice- to give us the incredible opportunity to be independent things, to live our own lives, to be ourselves. What truly has the potential to shape us is our free will, who we decide we want to be. Relationships are built upon commonality. We do best when we see beyond our own pain to something more. All pain passes. While the experience itself was not in your hands, your response to it was. According to the difficulty is the reward. Greatness is much more often found among those who face adversity head on and overcome it. Everything has the potential to be good and everything has the potential to be bad. Our reaction to what happens is the deciding factor. There is nothing that happens to us in this world that is good or bad. All is completely neutral. Quantitative easing. After the 2008 crisis, the Federal Reserve engaged in quantitative easing. What exactly is quantitative easing? Basically, the central banks purchase bonds and securities. This increases the money supply in the economy, lowering the cost of money and the cost of borrowing as well. A lower cost of borrowing, or a lower interest rate… increases economic stimulation. Now, Jerome Powell, Chairman of the Federal Reserve, said that the Fed's balance sheet will be "substantially smaller" going forward. This "quantitative tightening" began in 2017 and has now reached $50 billion per month and has reduced the balance sheet by $400 billion. Many analysts on Wall Street believe the Fed should not seek to reduce the balance sheet and hike the interest rates, as doing so could lead to increased volatility. ETFs vs Mutual Funds vs Index Funds.One of the many trends that changed over the year was the large investments that were made in ETFs. For investors looking to invest in dozens of stocks or even industries, mutual funds, index funds and exchange-traded funds have been the way to do that. Mutual funds allow you to invest into a basket of assets like stocks and bonds that are professionally managed while charging the investor a fee that usually makes it the most expensive of the three options. An index fund is a fund that will track many of the stocks that make up a certain category, like the S&P 500. Index funds generally charge the lowest fees since they are not actively managed and simply track a benchmark. The newest platform to the mix is the exchange-traded fund or ETF, which due to its convenience is becoming more popular. Unlike other funds, an ETF can be traded as easily as the average stock. There are currently 9,356 mutual funds registered in the US that manage nearly $19 trillion. Over the course of 2018, billions of dollars were transferred from actively managed mutual funds into passively managed mutual funds and ETFs. Currently, index funds account for 29% of the U.S stock market, but based on the current trend, Moody’s estimates that by 2024 passive funds will surpass actively traded funds. By the end of 2018, ETFs held nearly $4 trillion and continue to grow as they become increasingly popular. ETFs that tracked the market as a whole performed the least poorly while ETFs that tracked the oil industry lost as much as 75% of their value. Overall, I believe the best approach for the average investor is to invest in low-cost passive mutual funds or ETFs that index the market, but don’t take my word for it back in 2013 Warren Buffet offered this advice, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” What you should know about the Fed’s last speech.
Keep Climbing, The Alchanati Campbell and Associates Team |
AuthorWHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now. Archives
July 2020
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