Happy Spring Candor Family!
I love the Bill Murray/Andie MacDowell movie that immortalized the idea that a Groundhog Day is synonymous with a repetitive cycle that you can’t break away from. This year, Punxsutawney Phil’s prediction of a longer winter is currently getting mixed reviews. Some say the late winter nor’easter that dumped two feet of snow on much of New England proved him right. Others feel the blizzard missed the deadline.
It may surprise you to hear that the furry forecaster of frosty Februarys hasn’t exactly held up to the folklore. With only 39% accuracy, a flip of a coin would have served us better at least 20% of the time. In fact, there are many other animals we could be watching for weather tips. Frogs, ladybugs, birds and even cows are some of the most reliable. Heck, a Holstein cow can even fertilize your lawn and put cream in your coffee and you’ll always know when it’s about to rain when they lay down. Try getting that from a rodent. But it makes a good story so we keep talking about it.
In a similar story, the Federal Open Market Committee has announced recently that the U.S. banking system is “sound and resilient.” As the Fed tightened once again last week, we have reached the highest level of fed-funds rate since October of 2007. Two banks have officially failed in the US, and one hangs in the balance. Interbank bailouts and Fed “BTFP” Loans have come into season along with crawfish and soft-shell crab. Incidentally all four of these are ingredients for making at least one po-boy. (Sound familiar, anyone?)
It does to me. So this week I looked back at FDIC’s website to see what bank failures were like during the unforgettable Global Financial Crisis almost sixteen years ago. According to their own data, the last time we had a bank failure of this magnitude was 2008 when Washington Mutual was forced to be acquired by JP Morgan Chase for $1.9 Billion. At its demise, WaMu’s assets were $307 billion and deposits $188 billion. Bank failures continued in droves until they settled down about 2014. Compared to the recent Silicone Valley Bank and Signature Bank failures (which were $209 billion and $110 billion respectively), one can’t help but wonder, “Will there be more to come?”
The truth is, we know about as much as a Pennsylvania groundhog at this point. It’s still too early to say when and how deep the pain will be, but there’s no doubt these failures are indicative. Things were a lot different in 2007. The Fed had just peaked from a long string of rate hikes that started in 2004. Energy and Real Estate were the main contributors to inflation, and unemployment was already rising alongside some deterioration in the housing markets. The FOMC was slow to reduce rates, and their press comments were cautious but hopeful as they proceeded through deteriorating conditions in 2008. They even paused in mid-2008, and didn’t go to zero until December. This means it took the Fed over a year to ease monetary policy all the way, and by the time they hit zero, the worst was yet to come (Q1 2009). In contrast, today we have much higher inflation (6%), a more aggressive Fed policy (0-5% over 9 large hikes in 12 months), and a stubbornly low unemployment rate.
Also notable from that Great Recession era, is that the NBER didn’t call the recession until a full year after it had begun. (Yes, during the same year the Fed was easing and unemployment was rising.) They based their recession start date of Dec 2007 on unemployment data which is often revised months after it is first estimated. That’s where our present situation differs greatly. Unemployment is still very low. According to the US Bureau of Labor and Statistics, the national unemployment rate landed at 3.6% in February ’23. This is usually a sign of a hot, inflationary market.
While the recent data does point to a decline, it’s important to remember that earnings and credit are still fairly sound, but starting to move south. Historically it can take time for a recession to commence (unemployment rising, layoffs, dollar falling, deflation, etc.) and we are not there yet. In fact, if we consider the last 10 recessions (not counting Covid-19) it took an average of 25 months between the initial rate hike and the beginning of recession. (See NBER site for data.) Furthermore, unemployment always rises through the recession, peaking at or near the end.
I’m not making any predictions, here—and for good reason. The stock markets can be even more unpredictable during this part of the cycle. Many financial advisors will tell you to load up on stocks at this stage. I disagree with that on the basis of past recessions: the first year of rate hikes hasn’t been the best time to double down historically.
Punxsutawney Phil has a similar tact. He’s all in or all out. And his record isn’t very good. Instead of making a drastic move, try investing a little at a time. Dollar-Cost Averaging is a great way to introduce new cash to investments in volatile times, as it reduced the risk of picking the wrong time.
On the flipside, those who are needing to withdrawal from equity accounts may want to consider changing their strategy in a similar way. If you typically take your RMD all at once, you might consider taking it in monthly distributions instead. This can reduce the risk of being forced to sell when the market is at a low point.
Most importantly, stay diversified, stay in quality investments, and keep enough liquidity to get you through a bad year, especially if you are self employed or retired, or paid by commissions on sales. If credit markets worsen, this will likely cause more deterioration in lower rated stocks and bonds. A series of bank failures, should that happen, would catalyze such an event.
A good financial advisor can help you with these strategies. If you or someone you know is unsure about your situation, it’s important that you get the conversation started now. Sometimes just updating your financial plan with your advisor is all that’s needed. Other times, changes are in order. If you haven’t built a relationship with an advisor, or have reservations about anything, please reach out. I’m always happy to help and there are no strings attached.
In the meantime, I hope you are out of your winter den and bravely getting outside and into the warmth and light of the sun, and doing what you love. Break out of the Groundhog Day pattern and do something different. You’ll be glad you did!
Always with Candor,
Ivan
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
*The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.