My son was up the other night worried about getting a shot. Like any 11-year-old kid, it’s an unpleasant experience that he’d rather not deal with. So we talked about the fear of the shot, which my wife thought was the worst part, followed by the reality of the shot, which is uncomfortable but not horrible, followed by the joy of being done, which is clearly the best part.
The explanation worked! He was able to get back to bed.
The same explanation can be applied to our situation in the financial markets. This year has been marked by fear and anticipation of what will happen to the economy as they raise rates at a historic pace to slow our overheated economy. Starting now, and in 2023, the reality of the rise in rates will play out as the housing market and the stock market react to the changes in the economy. This will be followed by the joy of being done with record inflation, record interest rates increases, and the uncertainty surrounding those.
We’ve spent the entire year hashing and rehashing the reality of what will happen, and the stock market has suffered as a result. Fear is the worst part as people who pretend to be fortune tellers try and predict the future with little accuracy. We’ve been there and done this. We can check fear off the list.
Now for the reality. The reality is interest rates have climbed dramatically. Residential mortgages are above 6%. The prime rate that banks use to lend money is at 7.5%. Credit cards are charging more. Car loan rates are up. Business loans cost more. The reality of higher rates is settling in.
In Portland, OR housing is down 1% in the last year, but down 12% since May 2022 according to Redfin. November retail sales slowed more than expected last week showing the holiday shopping season getting off to a slow start, private business activity slowed more than forecast, and as we all know, the stock market is down.
The reality is the economy is slowing down and that will cause some discomfort as companies report lower earnings and stocks bounce around as a result. BUT, the slowing is what we need for inflation to come down, and it is FINALLY coming down. December’s reading was 7.1% versus the 9.2% reading in August. This is evidence the Federal Reserve needs to stop raising rates to slow the economy, which is causing the discomfort.
Like we told Henry, the discomfort is no fun, but it tells us we’re almost at the end of the process and the joy of getting through it is right around the corner.
In my last letter, I wrote how stocks typically come roaring back as the economy exits a recession. This is what we invest for. The elation that comes from getting through another tough scenario usually carries the economy and the stock market up for several years, which should get us back to the highs of 2021. Then surpass the old peak to new highs.
As usual, the time frame is unclear as we approach the new year and the new reality of the slower economy ahead. However, this was also true in 2020 as the uncertainty loomed from Covid, in 2008-9 as a financial crisis was slowing things down, and in 2001 during the tech boom and subsequent recession. The same joy that came as we got through those tough times will be the same joy that will come as we get through the challenges of inflation. That should be enough to get us to new highs. So bring on the joy!
To help us participate even more in the joy of the recovery, we still have cash on the sidelines to invest in most accounts. We made some trades in September and invested in CDs in some accounts, but haven’t invested much since then. If there is more volatility in the first part of 2023, we intend to take advantage of that and put the rest of the cash we’ve been holding back to work in companies and funds we think will take advantage of the rebound in the latter half of the year.
We’ve finished sending the required minimum distributions out for everyone over 72 and are working on “Loss Harvesting” to minimize any taxable gain in accounts. Please let us know if you have any questions about that or anything else. Jeremiah or I will be in the office most days if anyone needs anything.
Finally, years like this always leave a bitter taste in our mouths because we care deeply about our clients and we take pride in helping them avoid bad decisions that cause worry and anxiety. The decision to own stocks this year is not preventing anxiety but causing it, and we are the ones who encouraged it.
This fact is not lost on us. However, you should know we made the decision to own stocks knowing full well this can happen and HAS happened. In fact, the stock market is negative about 27% of the time, and in the last 20 years, has been negative only three years: 2018, 2008, and 2002.
We had bitter tastes in our mouths during those years but I’ve found in my 17 years of experience, that bitterness doesn’t last forever. There are always sweet days ahead.
This year more than ever, we thank you for being our client.
May your Christmas and New Year’s sweeten your year.
Thanks for reading,