Financial Insights- May 27, 2022

Remembering Those That Served and Gave the Ultimate Sacrifice

In many corners of this country, Memorial Day marks the unofficial start of summer. Originally, this national holiday honored the 500,000 lives lost during the Civil War, the deadliest war in our history.

Initially, we celebrated Memorial Day as “Decoration Day” on May 30th because the flowers were in bloom across the nation. In 1873, New York became the first state to recognize it as a holiday. In 1968, as a result of the Uniform Monday Holiday Act, the date was changed from May 30th to the last Monday. Believe it or not, it wasn’t until 1971 that it became a federal holiday. As we enjoy time with family and friends this weekend, let’s not forget all of those that gave their lives so that we could enjoy ours.

Student Loan Debts Are Getting Worse

During COVID, student loan debt repayments were suspended. Unless President Biden extends the pause on student loan repayment, the deadline ends on August 31, 2022. If he does, it will likely be towards the end of the year. Many in Congress within the Democratic Party want to forgive some or all the debt. That drives many who have paid their debts (student loans and other forms of debt) crazy.

How big is the problem? According to the Kiplinger Letter, it is a $1.6 trillion problem growing every day. While many borrowers have small balances, 10% owe more than $80,000. Would you believe that 23% of the debt is owed by people over age 50? The average debt load at graduation is $28,400 as of the end of the 2020 school year, and about half the grads carry debt. Worse are those that have debt but didn’t graduate! Still, it seems that a degree pays off with a projected lifetime income of $2.8 million versus $1.6 million for a high school grad.

Financial Literacy of Americans Is Very Low

As the wealthiest country in the world, America has a financial literacy problem that needs to be quickly corrected. April was Financial Literacy Month. Florida’s governor, Ron DeSantis, signed a new bill into law that will require every graduating high school senior to take a semester-long course on managing finances. This is a good start, but it will not help the people who do not graduate from high school and will likely remain financially illiterate.

Just how bad is the problem? Dismal. WalletHub’s Wallet Literacy Survey measured financial planning by looking at habits like credit scores, whether people had emergency fund, used online financial services, and taken any financial courses. Based on a composite score of the 34,000 residences surveyed, here are the ten worst: 10) District of Columbia; 9) New Mexico; 8) Connecticut; 7) West Virginia; 6) Mississippi; 5) Alaska; 4) Oklahoma; 3) South Dakota; 2) Louisiana, and 1) Arkansas.

Retirement Challenges Continue for Women

In a previous ProVise Perspective$, we noted that women face unique retirement challenges because, on average, they live longer and earn less than men. Did you know that women spend nine more years out of the paid workforce than men, caring for children and/or aging parents?

To accommodate their caregiving responsibilities, women frequently work part-time with less or no access to retirement plans such as 401(k)s. Therefore, they miss out on using an important tool for retirement savings.

As the U.S. Government and Corporate America shift the responsibility of retirement planning to individuals, women need to understand better how to plan for a secured retirement that reflects their lifestyle and values. How are you saving for retirement? (Source: WISER’s Top 5 Retirement Challenges for Women, November 18, 2019)

Putting the Current Environment Into Perspective

The last few months have been painful for most investors. The Fed’s monetary tightening, Russia’s invasion of Ukraine, and China’s zero-COVID policy have converged on investors’ portfolios to pose threats that seem unprecedented. The negative sentiment can be overwhelming, but we would invite you to take a step back for some beneficial perspective. And you don’t have to look back too far. Let’s compare the current environment to that right before the pandemic, in February 2020.

Is the market expensive? The S&P 500 is currently trading under 17 times forward year earnings estimates. It was trading at 19 times in February 2020. By the way, the market is up 22% since then. What about the health of the U.S. consumer? After all, consumer spending makes up almost 70% of U.S. GDP. Credit card balances are 8% below pre-pandemic levels and bank account balances are 40% above, i.e., consumer balance sheets are stronger. And economists have adjusted their economic growth estimates accordingly. Consensus expectations for 2022 real GDP growth have risen from 1.8% in February 2020 to 3.1% currently. But aren’t interest rates much higher? The 10-year U.S. Treasury Note is currently yielding about 2.75% vs pre-pandemic levels of about 2.0%.

The major negative difference between now and February 2020 is high inflation, but that is being exacerbated by two of the three headwinds previously mentioned. With these negative factors potentially priced into the market, risks could be skewed to the upside. Should China end its lockdowns or the Russian/Ukraine war end, a bull market rally would be likely. So, if we were to tell you in February 2020 that the market would be cheaper, economic and corporate growth would be higher, and consumer health would be stronger, would you say that the investment environment was incrementally better? It would be difficult to say otherwise.

Inflation, Back to the 70s?

In the early 70s as the war in Vietnam was winding down, America began to see the early signs of inflation. Using the power vested in him by the Economic Stabilization Act of 1970, President Richard M. Nixon invoked wage and price controls for 90 days on August 15, 1971. This was the first time since World War II that America found itself in this situation. Following the 90 days, the government’s Pay Board and Price Commission had to be consulted for approval. When the controls disappeared after the 1972 elections, it should have come as no surprise that prices and wages jumped dramatically. Then, the Arab oil embargo started, which caused energy and gas prices to leap forward as supplies dried up. Lines at the gas pumps grew longer. Americans were forced to get gas on odd or even days depending on the last digit of your license plate. After Nixon resigned, President Gerald R. Ford and Alan Greenspan, the Chairman of the Council of Economic Advisors, embraced a campaign known as “Whip Inflation Now” and even created a button with “WIN” on it.

But tepid growth, combined with inflation, continued. Because there was very little growth in GDP, the term “stagflation” entered the vocabulary of every American. Interestingly, the phrase is attributed to British politician Iain Macleod who became Chancellor of the Exchequer in 1970, but first used the term in a 1965 speech to Parliament when there was high inflation and high unemployment in Britain.

During 1976, unemployment was at 7.7% and the inflation rate hit 12%. The campaign was a disaster and in part led to Ford losing the 1976 Presidential election to Governor Jimmy Carter of Georgia. But things did not go much better for Carter as inflation persisted. Then along came Federal Reserve Chairman Paul Volcker, who raised interest rates dramatically. The Federal Reserve Fed Funds rate reached 15.5% in late 1979, climbed to 20% in March of the next year, but were back down to 12% on election day 1980. The Fed’s belief at the time was that interest rate hikes would break the back of inflation. Enter Ronald Reagan, the B-movie actor from Hollywood who soundly defeated Carter.

Volcker surprised Reagan by raising interest rates once again as inflation persisted. But in addition to raising the Fed rate to 20% once again, Volcker decided that reducing the money supply was at least equal in importance to raising interest rates. Not only would it cost more to borrow money, but there would be less of it. Inflation dropped dramatically and by 1983 inflation was at 3.2%. Inflation remained between 3.5-4.5% for the next several years and fell as low as 1.9% in 1986.

We give you this background so that those who did not live through this time might gain some historical knowledge as commentators make comparisons to today. Today we have a 3.6% unemployment rate, which translates into approximately 5.9 million people looking for jobs and employers posting over 11 million jobs. The unemployment rate in 1975 hit 8.2%, but by 1982, it had reached 10.8%. Inflation today is running at about 8%. Inflation is caused when too much money chases too few goods. Americans have accumulated a lot of money during the pandemic, both because they couldn’t spend it and because of the payments from the government. Businesses cut back during the pandemic and supply chain problems ensued. That sets up for a classic bout of inflation which will not abate until the money dries up and/or the supply of goods increases. As the year goes by, both will likely happen, but don’t expect the problem to go away entirely. It took almost a decade to tame inflation in the 70s and early 80s. While we don’t think it will take a decade this time, it won’t be solved in a few months; it may be better but not solved.

But what about the stock market during the ’70s and ’80s? According to officialdata.org, $100 invested into the S&P 500 in 1970 became $95.47 by the end of 1974 which was about the end of the 73-74 crash. By the end of 1979, it grew to $182.99 representing a 6.23% return for the decade. If we then look at the next five years, which also had high inflation, the value of the investment would have gone to $361.62, representing a compounded annual return of 8.95%. And, for those that invested back in 1970 and stayed invested through everything that happened over the 52 years since, the $100 investment was worth $21,889.84 by the end of 2021 for a return of 10.92% annually. Okay, so some of us do not have another 52 years. Over the past five years (2017-2021), the return was 17.05% making the investment worth $219.64. Even updating the performance through May 24th of this year the investment would be worth $184.54 for an average annualized return of 11.98%. It is the time you are in the market, not out of the market that creates wealth.

To be a successful investor, be patient, do not panic, and believe in the American free enterprise system.

IMPORTANT DISCLOSURE