Well, we’ve come to the end of a tumultuous quarter for the markets, and for the world. As I reflect on this, I’m struck by a sense of being trapped in a long-term “Groundhog Day” plot-line. I keep waking up to news of market turmoil followed by political turmoil, exacerbating more market turmoil, rinse, repeat. And I begin to wonder if this is the nature of things when you live in a globally connected market economy and a 24/7 news cycle. Or maybe it’s the human condition. By this I mean simply that we’re always looking “as through a glass, darkly.”
When I feel this confounded, it’s helpful for me to go back to basics:
- One cannot predict the short-term movements of the market; thus,
- One shouldn’t try, because in doing so one (that “one” would be me and my trusty team) could make things worse; thus,
- Always remember that a portfolio is both PERSONAL and PARTICULAR: It is about knowing your client extremely well and understanding how much money they will need, and when they will need it.
That said, we are concerned about a few dark clouds on the horizon, and we’re tracking them carefully.
First, consumer debt set an all-time high at the end of the fourth quarter in 2017, soaring to $13.15 TRILLION according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. The bulk of this debt is mortgage debt, at $8.8 trillion. The good news is that this is still 4.4% below the mortgage debt record set in 2007. The bad news is that the remainder is in home equity debt, auto loans, credit cards, and of course student loan debt at $1.38 trillion. As interest rates rise, servicing this debt could become more difficult for the debtors, and thus defaults could increase.
Second, corporate debt is at its highest level since the financial crisis, relative to GDP. According to the Federal Reserve, corporate debt has risen by $1 trillion in the past two years. Corporations have been able to borrow at extremely low rates, and had they used this money to increase their capacity to prepare for increased growth, this would be less worrying. Instead, the bulk of the money borrowed has helped increase their share prices via share buy backs, which in turn has fueled increased share prices. For now, as long as the economy expands and interest rates don’t rise TOO quickly, things are likely fine. If either scenario goes wrong, however, there could be trouble not just in high yield bonds, but with higher quality corporate bonds as well.
Third and finally, government borrowing reached a debt-to-GDP ratio of 105.4 as of the end of 2017. I don’t need to recount the headlines indicating that this is going higher given the recent tax policy changes. The 105.4 puts us third among developed nations. Japan takes the first spot at 253, then Spain at 131.80. What does this mean? It depends on who you read and your estimations of growth for the US economy. Minimally it SEEMS to mean that in order to fund our debt, we will need to sell more treasuries. And to sell more treasuries it would SEEM that we would have to offer a higher interest rate to get folks (individuals, companies, other countries) to buy those treasuries. So, rates should rise, theoretically at least. How much and how fast is anybody’s guess.
Given all these concerns, what are we advising our clients to do? Well, it depends:
If you are already in retirement and/or using your portfolio to supplement your income, we’ve already begun to raise more cash for your “silo.” We are alert and defensive.
If you are five to ten years away from that moment when you will “make work optional,” but are anticipating using your portfolio to supplement your income in retirement, we’re adjusting our expectations of growth going forward when we make calculations about how much you need to save and where best to invest the money. And we’re mindful that bonds, because of the likelihood of rising rates, are not the safe haven they have been in the past. Thus, we will continue to maintain a high stock exposure and check-in with you about how much of a “ride” you can stand before you become motion-sick and want to sell out when the inevitable declines get going.
And finally, if you are in your 40s or younger, this is a great time to ramp up your savings, pay down your variable rate debt, and do your best to ignore the near-term market gyrations. Despite our debt concerns, we do not believe the global market economy is going anywhere, so saving and investing into it and taking the long view is our best advice. If you’re tempted to believe that rising sea levels, pollution, or political decay will change everything, I remind you of my favorite mantra: “Apocalypse is not a retirement plan.” Don’t let your fears make you complacent about planning for your future or the future of those you love. Every generation has toyed with the thought that it was “the end one.” So far, they have all been wrong.
And remember these wise words: “We’re all just walking each other home.”
(a quote from Ram Dass, but sometimes attributed to Rumi – perhaps it’s both?)
The photo above was taken by Tom Barrett from Unsplash.