Month: May 2023

Wishing a safe and peaceful Memorial Day.

The Springs of Inspiration

Written by Minich MacGregor Wealth Management on May 26, 2023. Posted in Uncategorized.

Every Memorial Day, we as Americans take time to remember the soldiers who died serving our country. We lay flowers at their graves. We touch the monuments erected in their memory. Sometimes, we even walk on the same battlefields where they fought and fell. Knowing all the while that we wouldn’t be here without them.

In our opinion, this is an American tradition as patriotic as singing the national anthem or reciting the Pledge of Allegiance. And it makes Memorial Day as important as Independence Day or Thanksgiving. Saluting our fallen, honoring their sacrifice, and vowing to build on the ground they broke is the least we can do. Furthermore, we believe it inspires us all to be greater citizens ourselves.

Recently, we came across a speech given by President Woodrow Wilson on May 30, 1914, at the National Cemetery in Arlington. At the time, Memorial Day already had a long history, but it was not yet as standardized as it is today. But with the last veterans of the Civil War passing away, and new storm clouds gathering over Europe – World War I would break out a few months later – more and more Americans were realizing the importance of giving thanks to those who gave their lives.

Wilson’s speech – which he apparently gave without any preparation – perfectly describes why this is such a vital tradition. In honor of the holiday, we thought we would share some excerpts from it with you. We hope the words touch your heart as much as they have ours.

We are so grateful for this nation. We are so humbled by the knowledge others died so that our country might live. Now, it is our job to ensure their memories forever live on, too.

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a safe and peaceful Memorial Day.

Memorial Day Address
Given by Woodrow Wilson, 28^th President of the United States, on May 30, 1914

Ladies and Gentlemen, I have not come here today with a prepared address. But I will not deny myself the privilege of joining with you in an expression of gratitude and admiration for the men who perished for the sake of the Union. They do not need our praise. They do not need that our admiration should sustain them. There is no immortality that is safer than theirs. We come not for their sakes but for our own, in order that we may drink at the same springs of inspiration from which they themselves drank.

Whenever a man who is still trying to devote himself to the service of the Nation comes into a presence like this, or into a place like this, his spirit must be peculiarly moved. A mandate is laid upon him which seems to speak from the very graves themselves. Those who serve this Nation, whether in peace or in war, should serve it without thought of themselves. I can never speak in praise of war, ladies and gentlemen; you would not desire me to do so. But there is this peculiar distinction belonging to the soldier, that he goes into an enterprise out of which he himself cannot get anything at all. He is giving everything that he hath, even his life, in order that others may live, not in order that he himself may obtain gain and prosperity. And just so soon as the tasks of peace are performed in the same spirit of self-sacrifice and devotion, peace societies will not be necessary. The very organization and spirit of society will be a guaranty of peace. Therefore, this peculiar thing comes about; that we can stand here and praise the memory of these soldiers in the interest of peace. They set us the example of self-sacrifice, which if followed in peace will make it unnecessary that men should follow war anymore.

We are reputed to be somewhat careless in the use of the English language, and yet it is interesting to note that there are some words about which we are very careful. We bestow the adjective “great” somewhat indiscriminately. A man who has made conquest of his fellow-men for his own gain may display such genius in war, such uncommon qualities of organization and leadership that we may call him “great,” but there is a word which we reserve for men of another kind and about which we are very careful. That is the word “noble.” We never call a man “noble” who serves only himself; and if you will look about through all the nations of the world upon the statues that men have erected, you will find that almost without exception they have erected the statue to those who had a splendid surplus of energy and devotion to spend upon their fellow-men. Nobility exists in America without patent. We have no House of Lords, but we have a house of fame to which we elevate those who, forgetful of themselves, study and serve the public interest, who have the courage to face any number and any kind of adversary, to speak what in their hearts they believe to be the truth.

We admire physical courage, but we admire above all things else moral courage. I believe that soldiers will bear me out in saying that both come in time of battle. I take it that the moral courage comes in going into the battle, and the physical courage in staying in. There are battles which are just as hard to go into and just as hard to stay in as the battles of arms, and if the man will but stay and think never of himself there will come a time of grateful recollection when men will speak of him not only with admiration but with that which goes deeper – with affection and with reverence.

So that this flag calls upon us daily for service, and the more quiet and self-denying the service, the greater the glory of the flag. We are dedicated to freedom, and that freedom means the freedom of the human spirit. All free spirits ought to congregate on an occasion like this to do homage to the greatness of America as illustrated by the greatness of her sons.

It has been a privilege, ladies and gentlemen, to come and say these simple words, which I am sure are merely putting your thought into language. I thank you for the opportunity to lay this little wreath of mine upon these consecrated graves.

You can find the full version of this speech here: www.presidency.ucsb.edu/documents/memorial-day-address

Correction Incoming?

Written by Minich MacGregor Wealth Management on May 17, 2023. Posted in Uncategorized.

Markets are doing their thing again, so let’s discuss.

Markets tumbled, heading into negative territory, and then bounced back. And then promptly fell again.¹

We’re caught in a whipsaw pattern of uncertainty.

Is this weird?

Not really. These things happen pretty regularly when investors get jittery.

Let’s talk about what’s going on.

(Scroll to the end if you just want our takeaways.)

What led to the selloff?

Phew. There’s a lot going on.²

There’s yet another debt ceiling deadlock between Congress and the White House.

Worries about the banking sector continue.

Sticky inflation is still on everyone’s radar.

And then there’s the endless speculation about recessions and what the Federal Reserve might do next.

All these stressors lead to jumpy investors and nervous markets.

Could we see another serious correction?

Absolutely. If the debt ceiling standoff drags on or more bad headlines appear, markets could react negatively.

And, corrections and pullbacks happen very frequently because there’s always something going on.

How often? Let’s go to the data.

Here’s a chart that shows just how often markets dip each year. (You may have seen this chart before because it’s an oldie and goodie.)

Take a look at the red circles to see the market drops each year.

The big takeaway? In 15 of the last 23 years, markets have dropped at least 10% each year.³

Market pullbacks happen all the time.

We’re dealing with a lot of uncertainty and investors are feeling cautious.

However, that doesn’t mean that we should panic and rush for the exits.

Markets are going to be turbulent this year and knee-jerk reactions can be costly.

We don’t have a crystal ball, so we don’t know how it’s all going to play out, but this situation isn’t surprising.

We expected volatility and we’re prepared.

We’re watching markets closely. Any questions or concerns we can address? Let us know. We’re here to help.

Sources

The Duality of the Markets

Written by Minich MacGregor Wealth Management on May 11, 2023. Posted in Posts.

Have you ever noticed how so many idioms refer to the duality of life? Consider: There are two sides to every coin. Life is a double-edged sword. You can see the glass as half-full or as half-empty. Every cloud has a silver lining.

Each of these sayings refers to the fact that almost everything in life can be seen as either good or bad; it’s all based on what we focus on. Sometimes, it can even depend on which “side” we see, hear, or learn about first. Even science has found this to be true. For example, in 2014, two psychologists named Angela Legg and Kate Sweeny ran an interesting study. Two groups of people filled out a personality inventory. The first group was told they would get feedback, some positive, some negative. The second group learned that they would be the ones to give it.

The study found that 78% of the people in the first group wanted to hear the negative stuff first.¹ That’s because they believed that if they got the bad news out of the way, they could end on a good note, and their day wouldn’t be ruined.

The second group – the ones giving the feedback – were divided. Roughly half focused on what they thought the recipient would want to hear and decided to give the bad news first. The other half focused on their own feelings and decided to give the good news first, because they felt it would be easier to start off with something positive. Either way, just about everyone in the study was preoccupied with the order in which to face both sides of the situation. It didn’t matter if both the good and bad were roughly equal. What mattered was mindset.

We were thinking about this recently while pondering our next market message. The very message, in fact, that you are reading now. You see, there is a real duality to the markets at the moment. Storylines pulling the markets down, storylines pushing them back up. But which to focus on? Which to start with?

Given what we learned from that study we mentioned, we think we’ll start with the “bad” news before sharing the “good.” Then, we’ll explain why, when you think about it, it really doesn’t matter.

Interest Rates and Bank Failures

Perhaps the biggest drag on the stock markets – not just now but over the last year – has been the steady rise of interest rates. The most recent hike came on May 3^rd, bringing rates to a 16-year high of 5.25%.² Essentially, the Fed has spent the last year trying to combat inflation by cooling down the economy. When rates are low, consumers and businesses are incentivized to borrow and spend. But when rates are high, it’s meant to reward saving overspending. If people spend less and demand for goods and services goes down, companies have little choice but to lower prices if they’re to attract new business.

Unfortunately, these rate hikes are very much a – wait for it – double-edged sword. Because while they do serve as a deterrent against inflation, they can depress economic activity to the point of a recession. This fear of a recession, accompanied by lower earnings from many companies as a result of higher interest rates, has triggered some of the volatility we’ve seen in recent months.

But rising interest rates have done something else, too: Threaten the solvency of America’s banks.

On March 10, federal regulators seized Silicon Valley Bank, the sixteenth largest in the country. Two days later, New York’s Signature Bank collapsed. And on May 1^st, First Republic Bank in San Francisco was seized, too, with most of its assets promptly sold to JPMorgan Chase. Given how suddenly – and consecutively – these regional banks fell, many investors have been gripped by fear of contagion spreading across the entire banking industry.

While none of these situations were exactly the same, all three banks had certain things in common. For one, all made long-term investment bets that turned out to be far too risky. In the case of Signature Bank, this was in cryptocurrency, the value of which has plummeted in recent months. In the case of Silicon Valley and First Republic, it was placing far too much money in U.S. Treasury bonds. When interest rates began rising, the value of these bonds fell. Suddenly, these banks held most of their money – their depositors’ money – in assets that no one wanted. Furthermore, all these banks had an unusually high number of uninsured deposits. As a result, customers began withdrawing their money in droves. No bank can survive without deposits, forcing the government to step in and take over before everyone lost everything.

Now, three banks – out of the thousands that exist in the U.S. – may not sound like much. But since this started, investors have been combing the industry with a magnifying glass, trying to find which other firms might have hidden weaknesses. This has caused many banks’ stock prices to fluctuate wildly in recent weeks, acting as a further drag on the markets as a whole. It’s also added to recession fears. That’s because regional banks like these play a vital role in helping families, local businesses, and startups participate in the broader economy.

In each of these cases, the government has acted quickly in order to prevent any contagion from spreading. So, if all this banking turbulence stops with First Republic, well and good. But if other regional banks experience more credit shocks or a fire sale on their stock prices, this may well be a case of getting out of the frying pan only to fall into the fire. Stay tuned.

So, that’s the “bad news”. Now, let’s turn to a new subject that could be seen as either good or bad, depending on how you look at it.

Inflation

Since 2021, inflation has been the root cause of almost every bit of economic uncertainty. But the role inflation plays has changed over time.

The current spike in inflation started due to an explosion of economic activity after the COVID-19 lockdowns. Buoyed by historically low interest rates, Americans were shopping again, and not just for distractions to keep them busy while they were stuck at home. But this pent-up demand far exceeded supply, causing prices to skyrocket. Later, inflation became more driven by snarls in global supply chains. Then, it became exacerbated by the war in Ukraine. All these factors simply made it very difficult – and expensive – to get goods where they needed to be.

Lately, though, inflation has changed again. Now, the single biggest factor is not the price of goods, but of services. People aren’t just buying things again; they’re doing things again. Eating out at restaurants, going to sporting events, putting their children in daycare, and traveling. Meanwhile, a strong labor market has led to extremely low unemployment and rising wages. This has caused businesses to raise prices to compensate.

For these reasons, inflation remains stubbornly high, even after a year of rising interest rates. But here is where you can see the glass as either half full or half empty. The half-empty view would be that inflation remains high, meaning the Fed could keep raising rates. But the half-full view is that these same factors keeping inflation high are also keeping us out of a recession. (More on this in a moment.) Then, too, prices are coming down…just very, very slowly. (Back in March, prices were up 5% compared to the same time last year; that’s down from the 6% mark we saw in February.³)

Finally, let’s get to the “good” news…unless, of course, you’re the Federal Reserve, proving that even good news can be a double-sided coin.

Jobs

For months, analysts have predicted the labor market would slow down. Because of higher interest rates, companies would stop hiring, or even lay off workers. To be frank, this is what the Federal Reserve wants – at least to a degree. Because it’s this sort of economic cooldown that will tamp down prices. But it’s also been a main source of recession-based fears. When unemployment starts rising, a recession is often not far behind.

To date, however, it hasn’t happened. In April alone, the economy added 253,000 jobs. That’s far more than what most economists predicted. In fact, it’s brought the unemployment rate even lower, to 3.4%. That matches a 53-year low!⁴

This is terrific news. The more jobs there are, the more spending there is. The more spending there is, the more the economy will grow…or at least, not contract to the point of a recession. But unbelievable as it may seem, there is a counterargument. These job numbers may prompt the Fed to keep raising rates if they believe the economy can handle it…thereby injecting more uncertainty into the stock market and bringing us closer to a recession. Only time will tell which way investors decide to spin it.

The Takeaway

So, what are you thinking right now? Are you feeling positive or negative about the markets? On the one hand, we devoted more words to the “bad” news. On the other, we finished with a (mostly) positive note, with lower inflation and higher employment.

To be honest, however you react to all this says more about you – and more about how we wrote this message – than about the markets themselves. And that is exactly the point.

Positive and negative. Good news and bad. Yin and yang. Jekyll and Hyde. Dark side and light side. Half-full and half-empty. The fact is, there are two sides to almost every storyline impacting the markets right now. And most investors are picking and choosing what they react to, and how they react, based on which side of that duality they fall on. They choose one side of the coin, one edge of the sword. They turn investing into one big psychology experiment.

But we’re not most investors.

Moving forward, we need to accept that there are forces pushing the markets up and forces pulling the markets down. We can’t control which of those forces wins. Nor can we predict, day to day, which force will prove stronger. This is precisely why we have chosen a long-term strategy for investing. We don’t have to decide whether the glass is half-full or half-empty. We don’t have to stress over whether we hear the good news or the bad news first. We acknowledge both as important…but neither as everything. We don’t have to worry about guessing right because we never guess. Instead of guessing, we take a measured approach of analyzing the data, identify the areas of strength and weakness and make portfolio changes as necessary. As always, our team will keep watching all these storylines closely. In the meantime, our advice is to not stress about whether tomorrow’s news will be good or bad. We are always here to help you hope for the one and plan for the other…while remembering the words of one of our favorite idioms: Slow and steady wins the race.

¹ “Why Hearing Good News or Bad News First Really Matters,” PsychologyToday, June 3, 2014. https://www.psychologytoday.com/us/blog/ulterior-motives/201406/why-hearing-good-news-or-bad-news-first-really-matters

² “Fed increases rates a quarter point,” CNBC, May 4, 2023.
https://www.cnbc.com/2023/05/03/fed-rate-decision-may-2023-.html

³ “Inflation Cools Notably, but It’s a Long Road Back to Normal,” The NY Times, April 12, 2023. https://www.nytimes.com/2023/04/12/business/inflation-fed-rates.html

⁴ “US labor market heats back up, adding 253,000 jobs in April,” CNN Business, May 5, 2023. https://www.cnn.com/2023/05/05/business/april-jobs-report-final/index.html

A Brief Update on the Debt Ceiling

Written by Minich MacGregor Wealth Management on May 4, 2023. Posted in Uncategorized.

On May 1, the Secretary of the Treasury informed Congress that the U.S. could default on its debt by June 1 if legislators do not raise the nation’s debt ceiling.¹

This announcement was not a surprise. The U.S. officially hit the debt ceiling in January but were able to stave off any immediate effects using “extraordinary measures.” (These are essentially accounting tools the government can use to pay its bills without authorizing any new debt.) The Secretary’s recent message was to let Congress know those measures are close to being exhausted. Without raising the debt ceiling, the U.S. will not have the money it needs to pay its debts. And while the exact date this will happen is unknown, it could come by June 1 at the earliest.

Should a default happen, the economic consequences could be severe. But even if Congress staves off the unthinkable, simply going down to the wire can have negative effects on the markets. To explain why that is, it’s useful to first remind ourselves what the debt ceiling is.

The debt ceiling is “the total amount of money that the government is authorized to borrow to meet its existing legal obligations.”² What are these obligations? It’s a massive list. Think Social Security and Medicare benefits, for starters. Tax refunds, military salaries, and interest payments on Treasury bonds are hugely important, too. The debt ceiling, then, is the limit to what the government can borrow to pay back what it has already spent. (Or is legally obligated to spend.)

Normally, raising the debt ceiling requires a simple act of Congress. But in some years, politicians disagree about whether the ceiling should be raised without an accompanying decrease in spending. That’s the scenario we’re in right now. Congressional Republicans do not want to raise the debt ceiling without enacting spending cuts at the same time. Democrats, meanwhile, prefer a “clean” hike where the ceiling is raised without conditions. In their view, any changes to federal spending should come separately, after the nation’s existing debts are addressed.

In other words, the two sides of the political aisle are engaged in a game of fiscal “chicken.” Each betting the other will blink first.

The problem with this game is that at some point, if a resolution isn’t reached, everyone loses. While no one is quite sure what will happen if the U.S. defaults – it’s never happened before – it’s not hard to guess, either. Look at that list of obligations we mentioned earlier. Now, imagine if they all just…stopped. No Social Security checks. No Medicare payments. No tax refunds. Tens of thousands of soldiers and government employees without income. And don’t discount the importance of interest payments on Treasury bonds. Without this, interest rates would skyrocket and probably lead to a major recession.

Now, it’s important to note that this is not our country’s first rodeo with the debt ceiling. This has actually happened several times over the past twelve years. In each instance, Democrats and Republicans eventually came to an agreement and raised the ceiling. Most experts expect the same thing to happen this time.

That said, the two sides are still very far apart. While House Republicans have made a proposal on the cuts they want to see, most are measures that Democrats are unlikely to agree to. (The bill would lift the debt ceiling by $1.5 trillion through March of 2024 while eliminating $130 billion in government funds. But that’s not a very long time, and most of the cuts are to areas that the White House considers high priority.³) The two sides have agreed to a meeting on May 9, but it’s doubtful whether that will lead to anything.

The closer we get to June; however, the more nervous Wall Street will get. Given how much uncertainty already exists in the markets – thanks to rising interest rates and a recent spate of bank failures – a debt ceiling crisis is the last thing investors need. To be sure, there are other possible outcomes to this situation. Perhaps the most likely is that Congress enacts a short-term increase to the borrowing limit. This would give themselves more time to pass something longer lasting. It would also be seen as kicking the can further down the road…and not much further at that!

If the U.S. does default, there may be ways to blunt the impact. For instance, the government could prioritize its debt payments so that not everyone gets left out in the cold all at once. Another possibility would be for the Federal Reserve to buy up more Treasury bonds. This would at least stabilize the bond market. But none of these options are ideal, and it would be best for everyone to avoid them.

So, that’s where things stand. In the coming weeks, we’ll post more detailed information on what hitting the debt ceiling could mean for investors. (Assuming Congress doesn’t get its act together before then.) In the meantime, our team will continue to monitor the situation carefully.

As always, please let us know if you have any questions, or if there is anything we can do for you!

¹ “Treasury’s Yellen says US could default as soon as June 1,” The Associated Press, May 1, 2023. https://apnews.com/article/x-date-debt-ceiling-yellen-treasury-borrowing-f726fd88a9bb7f72e50f0b948731ac57

² “Debt Limit,” U.S. Department of the Treasury, https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

³ “No Solution in the Senate,” Politico, May 1, 2023. https://www.politico.com/news/2023/05/02/senate-parties-debt-00094873