Retirement Planning

In the Mood

A 2019 Gallup investor sentiment survey indicated that 52% of those surveyed said the performance of their investments affected their daily disposition, or mood. When broken down by demographics, an even greater number of retirees (63%) stated their moods were affected by the performance of their investments. Since this survey was conducted, we have experienced the Covid-induced market volatility of 2020 as well as the 2022 drawdowns in the stock and bond markets so it is likely if this survey was taken again today the results might be different, and not necessarily for the better.  From time-to-time analysts and the media will describe the stock market as having a mood, either positive or negative, which we have seen swing over the past couple of weeks. 

The first came on the heels of the credit downgrade by Fitch Ratings on debt issued by the United States from AAA to AA+ on August 1^st.  Markets moved lower the following day, with the Nasdaq having its worst day since February, but paling in comparison to the market rout that occurred in 2011 immediately following a similar (and even more surprising) move by Standard & Poor’s.  Fitch’s decision was based upon political dysfunction following contentious debt ceiling standoffs.  It remains extremely unlikely the U.S. will default on its debt and there is little doubt U.S. Treasuries will retain their status among the safest investments in the world.  However, this added layer of risk could push rates higher resulting in higher borrowing rates, such as mortgages and credit cards.  And now that two out of the three major credit ratings agencies no longer classify U.S. debt as AAA rated, perhaps it will get the attention of politicians to make some difficult (and politically unpopular) decisions towards better fiscal responsibility.  One of which very well could be in the form of higher taxes in the future. 

A week later the credit ratings downgrades of 10 regional banks, this time (ironically) from Moody’s Ratings, roiled the markets. They also placed the ratings of six banks under review and shifted the outlook of 11 banks from stable to negative.  In their report, the credit rating agency highlighted some of the issues that caused the banking crisis earlier this year have not disappeared, citing strains from a fast rise in interest rates eroding profitability.  Despite concerns about the stability of some of these institutions, deposits should remain safe from the regulatory backstops of FDIC insurance and the steps regulators took in the aftermath of bank collapses earlier this year. 

Mood Swings

Stock markets enjoyed a good month in July, with all major indices posting positive returns.  Value and growth performed in-line with each other, following through on a trend that began in June.  Prior to that point, growth stocks had largely outperformed value stocks in 2023, driven primarily by mega-cap tech stocks.  It seems the excitement and hype around A.I. is beginning to wear off as those stocks have become relatively expensive on a historical valuation basis.  The performance dispersion between sectors generally narrowed with almost all sectors performing well.  In a similar manner, small caps had an especially strong July, echoing decent performance in June after having a difficult first few months of the year. 

August is off to a more difficult start, especially in light of the aforementioned downgrades, with both the S&P 500 and Russell 1000 indices being lower by over 2%.  Value is generally outperforming growth as the technology sector has come under some pressure.  Investors have benefited from rather surprising positive returns so far this year so having the markets cool off a bit does not come as a surprise and is part of the normal market cycle. However, market sentiment is perhaps changing. Whether this becomes a longer-term structural change reflecting a slowing economy or is simply a short-term sector rotation remains to be seen.   

Even though the Fed is ostensibly winding down this cycle of interest rate hikes and inflation has become more benign, rates will remain higher for longer than previously anticipated, causing borrowing rates to remain at their highest levels in over two decades and continuing to put strain on consumers.  Employment remains strong, but the number of jobs created in July was less than expected so cracks may be appearing in the labor market.  And while one could argue about the validity of credit ratings downgrades, especially in light of the spotty track record of the ratings agencies during the 2007/2008 Great Financial Crisis, there is no reason to believe that the balance sheets of many institutions have improved, and we are not yet in the clear when it comes to the banking sector.  Oil prices have also moved higher, further putting a strain on budgets for families and companies. And even though the most recent inflation reports showed inflation continuing to slow this could reverse over the next couple of months if oil prices continue to move higher or remain where they are now. 

Looking Ahead

After raising rates a quarter point at their most recent meeting in late July, the Fed is now widely expected to pause for the foreseeable future.  Odds for an additional rate hike later this year slightly dropped after last week’s softer than expected inflation reports but this could change quickly if future data shows inflation remaining elevated or not continuing on its downward trajectory.  However, this most likely will not be a concern or affect markets over the next couple of months since it seems there is little that will impact the Fed’s rate decision at their next meeting in late September, absent an unanticipated event.

Speaking of the Fed, the annual Jackson Hole Economic Symposium will be held next week, August 24-26.  While this is not an official FOMC meeting and no action will come of it, Fed Chair Powell’s remarks last year did spook markets, sending them lower over the ensuing couple of months.  We would be very surprised to see a repeat this year, but the potential exists for comments from Fed officials to impact markets. 

Markets tend to be calm during the waning days of summer.    Earnings season is pretty much wrapped up, with the exception of reports from major retailers this week, and there are very few major economic releases prior to month-end so we do not have any reason to think this year will be different.  Often it is during the autumn months where we experience greater volatility in the markets.  This is a good opportunity to ensure your portfolio is positioned appropriately.  During retirement if you no longer can rely on a steady paycheck, investing money becomes an emotional commitment along with a financial one.  Be sure you have a solid income plan in place so you need not worry about what happens in the market;  do not let the performance of your portfolio alter your mood. 

Have a wonderful week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com

Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.   

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