Coasting in Retirement Ep 22: Is a Recession Coming? Yes.
Episode 22: Are we headed for a recession? Always.
Segment 1 (Show Open):
Good afternoon, everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Thanks for joining us today, we’re excited to have you! I am your host, Josh Null, alongside co-host Michelle Lee Melton, the Oates to my Hall, the Ginger to my Fred …Michelle, how are you? Great! We are once again in Coastal College’s recording studio, beautiful downtown Fairhope, hatching up another great show for those of you tuning in!
Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement living your best life along our part of the gulf coast. If you’re just tuning in to our show, welcome, you’re listening to Lower Alabama’s most dynamic financial radio show. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 20 minutes past the hour - fan favorite, “Michelle with the News of the Week”. 3rd segment, roughly 40 minutes past the hour, ”Josh’s Crystal Ball and…(Michelle:) Big Mouth”. That’s right, big mouth. So buckle up, we’ve got a lot to get to!
Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, an independent investment management and financial planning firm with offices in Fairhope and Orange Beach, Alabama. You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com, or feel free to give us a call at 251-327-2124. If you missed that, don’t worry, we will repeat our contact info several times throughout the show!
So, Michelle, this episode is part 2 of our mini-series on interest rates and bond yields, and these things relate to the stock market and the overall economy...and the big question of the day, are we headed for a recession? Listeners, you can find that previous episode, and all of our previous episodes, on Spotify or on the podcast tab of our website, but for now let’s sum up what we talked about: rapidly rising interest rates have caused havoc in the bond market, resulting in 2 major impacts to retail investors. First, investors’ existing bonds have decreased in current value, or price, because anyone buying existing bonds with a lower interest rate than they could get on a new bond is going to demand a discount in price, especially on longer term bonds, OR, put another way, a higher yield to accommodate the fact that the investor will be making less interest during the duration of the bond.
In short, as interest rates rise, existing bond prices decrease, and yield increases. This fact alone is enough to beat up bond holders, but it’s the second piece that has had a broader impact on the overall stock market, including equities, it’s called the inverted yield curve, and basically what it means is that interest rates on longer term debt instruments have lagged the interest rates on short term securities. Why is that a bad thing, you ask? Because investors and consumers are conditioned to the Fed reducing interest rates to prop up the economy and the stock market, and if interest rates are projected to be lower on long term securities, that means in general that investors and consumers have a negative outlook on the where the economy is headed, and that the Fed will lower rates.
So as a numbers nerd, one of the reasons I appreciate these 2 facts, versus some of the emotion that goes into the equities markets, is because it’s just basic math: interest rates HAVE risen and bond prices HAVE fallen, and long-term rates HAVE lagged behind short term rates. It’s black and white. What isn’t so clear is what this means for projecting a recession, or an economic contraction. So what we are going to attempt to do today is use the basic math of what’s going on in the bond market combined with some life experience and common sense to answer the question that’s been on everyone’s mind for some time: are we headed for a recession?
As we dive into that question, let me pull the rug ever so slightly on you listeners, because the short answer to “are we headed for a recession?” is yes. Yep. Yessiree. The answer is always going to be yes because of how we have set up our market-based economy. Our economy, by design, is defined by the business cycle of expansion and contraction. On the expansion side, there’s always some input into the equation of predicting where the economy is heading, some factor, that leads to investment in particular parts of our economy, that is often fueled by either Fed interest rate or monetary policy, that eventually peaks, then recedes.
Let me give you an example of a changing input. Many of you listening are part of the Baby Boomer generation – take a minute to think about what the sheer volume of human beings in your generation has meant to construction, to housing, medical care, the service industry, etc. This is an input that led to expansion in many parts of our economy. On the contraction side, long term high interest rates, high bond yields and high borrowing costs are always going to contract the economy, eventually. That’s the point of raising interest rates. The only way to get inflation down is to tamp down demand, which as someone that graduated with an Economics degree from the Harvard of the Midwest, Missouri State University, can tell you: when you have less demand than supply, prices fall and the economy contracts.
So, in my opinion, the question isn’t if a recession is coming, because the answer is always yes, and in this particular case, probably sooner than later, but I think there’s 2 important questions that are more important to address: First, what part of our economy, what “input””, is going to be the produce the runny nose that eventually leads to full blown flu? How bad does this flu get? Just a steroid shot in the butt bad? Or hooked up to a respirator bad? What would be the input - does tech finally come back to earth? Does lack of cheap money lead companies to abandon growth completely? Big, broad inputs, and listeners, I hate to tell you this, but you only have limited control over this question. It’s the second question that you have considerably more control: Do investors have any options to protect their investments against a recession?
Michelle – by saying we’re headed for a recession, I sound so glass half empty, don’t I? Out of character for sure. As a counter point to my opinion, savvy listeners will point to the fact that the major indexes – the Dow, S&P 500 and Nasdaq - have been fairly resilient throughout this rising interest rate and decreasing bond price situation, at least up until recently. Why is that? It’s primarily because the largest of the large cap companies in these indexes have shown the least decline, generally speaking. More specifically, if you look at another index, the Russell 1000, which is the highest market cap companies across the board all exchanges, the top 200ish largest market cap companies have been fairly strong this year, but the bottom 800ish are on average down for the year. That means, that in general, the largest 200 companies on American based exchanges have been the primary reason the overall indexes haven’t seen significant dips this year.
Let’s drill down and be even more specific: The Magnificent Seven – no, not the movie – the Magnificent Seven stocks – Apple, Microsoft, Alphabet (which is Google), Amazon, Nvdia, Meta (which is Facebook) and Tesla – have carried most of the water for the overall stock market averages for 2023. These companies have also shown the most resiliency against high interest rates and the discounted bond market. What rallies we’ve had have been “top-heavy” because of this. Why is this – why in an era of increasing interest rates and bond volatility, how have these companies nearly single handily held serve on the market? Because, these companies, and most of the largest cap companies, are in a position where they don’t have to re-finance into higher rates on their bonds, AND, consumers keep buying their products. For now.
So, let’s land this plane and get back to our original questions. If bond prices are falling, and yields are increasing, and we’re in a top-heavy stock market valuation, and the yield curve keeps inverting, and more concerning, bond yields breaking thru the significant line of 5%…does that means a severe recession is right around the corner? Again, there could always be a recession. There WILL be a recession at some point. What I am asking the listeners to do is to take a step back and view this question differently. If the math tells you that danger is probably ahead, whether it’s miles away or just a few yards, what can YOU do to be prepared?
The first step is – what the heck is actually in your portfolio? Are you seeing ups and downs with account balances that make you nervous, or even lose sleep? Michelle I can’t tell you how often someone will come into our office with an investment statement that is supposed to be on the conversative side, but once we do our analysis, is anything but. Not that investors should avoid all risk – we’ll talk about this later in the episode – but most investors really too much on what there being told versus what they are actually holding. I am from the Show-me State of Missouri, so if was an investor listening to this show, I would want someone to show me what I really invested in. We can do that at Gulf Coast Financial Advisors, it’s nerdy and I love doing it, 251-327-2124.
The second step is educating yourself on what options are out there if you are in or near retirement, and especially if you are someone deeply concerned about a recession and the impact that will have on your portfolio. There is a positive flip side to this high interest rate, high likelihood of contraction state we find ourselves in, and that is the offerings on fixed-income, fixed-interest- and interest-bearing securities are as attractive as they have been in YEARS.
Listeners – as the Gulf Coast’s self-designated honesty broker, I’m going to shoot you straight even though it does me no good – you can buy most if not all fixed income and fixed interest investments directly yourself without using a broker or advisor intermediary. Treasuries, bank CDs, Municipal bonds, corporate bonds, etc. A broker will charge you a one-time mark-up or commission on most of these and an advisor like me typically charges an ongoing fee for managing your investments. Now, if you don’t want to do-it-yourself, or have tried and don’t like it, then give us a shout and we can discuss all the options out there – not just what I listed but also the attractive options on MYGAs, money market funds, bond funds, etc, etc. 251-327-2124. You know what makes even more sense when making these types of decisions, Michelle? Having a financial plan to reference so you know how all the parts fit together. Call us! We can help!
How do you start the process of working with us? Easy. First, set up a no pressure, free, no obligation conversation with u. You can do that by clicking the calendar link and scheduling a call on our website gulfcoastfa.com, or by simply call 251-327-2124. Repeat.
Alright folks, coming up next! Every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Don’t turn that dial!
Segment 2 - Michelle with the News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Our job is to help you all understand how these headlines impact you, especially when it comes to your money! So, without further adieu, here’s “Michelle with the news of the week!”:
1. Michelle: Alright Josh let’s kick it off with a recent article from Forbes, titled “Recession or Soft Landing: What’s Next for the U.S. Economy?”. This article talks about the historical lag of monetary policy on the US economy, saying that it usually takes about 18 months for the full effect of rate hikes to kick in. Well, by my count, we are right at 18 months now since the Fed started increasing rates, and based on recent economic news, this appears to be correct. This article also mentions the inverted yield curve in its case AGAINST a soft economic landing, but points to strong employment and decreasing inflation in its case FOR a soft landing. So, which is it? Are we heading for a recession, and if so, will it be a soft landing or a ker-splunk?
https://www.forbes.com/advisor/investing/is-a-recession-coming/
2. Michelle: Next up is CNBC, coming at us with a more strongly worded article titled “A recession is coming and investors should be defensive, TCW CEO says”. So Josh, we’ve researched a lot of articles for Coasting in Retirement, and we’ve often shown how analysts can talk out of both sides of theirs mouths when it comes to predictions, sometimes even on the same website, so my first thought on this headline was, “ah, clickbait”. But in reading it, I have to say the CEO Katie Koch makes sense when she says that we haven’t had a real recession in over 15 years, and that the pain of higher rates is on it’s way. Katie makes the case that investors shouldn’t wait around for this pain and makes some conservative moves now, such as looking at Treasurys and well-capitalized companies. You agree?
Josh: Before we answer that question, let me pivot back to my perpetual glass half full personality and point to history to give investors a ray of hope. Rates have shown that they can be high, and the stock market can still perform well. Because all of us investors suffer from amnesia, or weren’t old enough, most don’t recall that during the 1990’s the average yield on 10 year treasury was 5.2%. The market performed reasonably well over the course of the 1990s. This scenario is almost exactly where we are now. The difference is the shock of the speed of rate increases and the unknown of how long will rates stay high. We are conditioned to something in the economy breaking and having the Fed come to the rescue. There’s history to this. In 1987, Alan Greenspan cut rates aggressively and the S&P rebounded from Black Money to end the year positive.
Same playbook since then. This is the Greenspan put, lower rates to save the stock market. Quit thinking about when the Fed will cut rates – it may not be for a long time. 1958 to today – nominal yields averaged (not inflation adjusted) 5.7%. WE are at 5.25. We are within history. REAL yield rates (minus inflation) we are just now hitting 2%. That is normal. What is not normal is the amount of movement on long term yields the past 30 days. End of June 30 3.85 now at 4.85.
Spreads have not blown out. This is a leading indicator of a recession. When you buy a corp bond compared to equivalent maturity in a treasury. Salesforce – 10 year bond, I should be getting a higher return than Fed – more risk. 101. We are not seeing corp bond yields being substantially higher than fed securities. Investors less willing to take on corp debt, therefore they sell off, therefore yields go higher, when that spread is high, look out. Bond investors are more risk averse than equities. Canary in the coal mine. Junk bonds and investment grade bonds are outperforming treasuries year to date. Not pricing in deterioration, actually doing better than treasuries.
So, part of your plan should be defensive, but you should always have a long play going, and I believe with all my heart that it needs to be a long term bet on America and it’s companies. That these companies will improve their profit over time, products get better, more efficient, etc. If your world philosophy differs, and you want to constantly try to profit off the failures of the market, then here me - you’re a trader, not an investor, and probably more bearish than the average investor right now.
https://www.cnbc.com/2023/09/28/a-recession-is-coming-and-investors-should-be-defensive-tcw-ceo-says.html
3. Michelle: Alright Josh, let’s pivot to a new site I found called “Investor’s Business Daily”. They have a fresh off the press article titled “Strategies for Investing in a Rising Interest Rate Environment”. This article is super detailed and fairly long, but with what appears to be a lot of good, common sense advice. For example, it talks about one of my favorite industry jargon terms, “laddering” with regard to holding bank CDs. It also mentions that investors should diversify their bond portfolio, which I found interesting because I’ve always thought that diversification was more about the stocks and mutual funds I owned. Lastly the article talks about industries that tend to do well in a high interest rate environment vs those that don’t, it makes total sense that the auto industry and retail tend to do poorly when rates are high. This article did get pretty technical towards the end of it, so with so much meat on the bone I’m just going to toss it to you – what are your thoughts about the strategies listed in this article?
Josh: This is a great article, and we will probably use it as the basis for the next episode – “what investors should do in a high interest rate environment” or something like that.
https://www.investors.com/etfs-and-funds/personal-finance/strategies-for-investing-in-a-rising-interest-rate-environment/
4. Michelle: Last article for today, and it’s from our good buddy ol’ Chuck Schwab. It’s called “Phasing Retirement with a Bucket Drawdown Strategy” and to be honest, you found this article and I struggled to see how it fit with our other Michelle with the News of the Week headlines. But once I read it, I think I get it. I’ll be the avatar for our listeners – Josh - you’ve spent most of your time in this episode laying out ways to be defensive in the short run with investments while also capitalizing on high interest rates, but you’ve also keep talking about how most investors should still consider having some of their portfolio in higher risk investments, like stocks and equity based mutual funds and ETFs. This article lays out how folks that are in or near retirement should put their money into different “buckets” of investments, and I think this ties into what you’ve been saying – care to expound?
https://www.schwab.com/learn/story/phasing-retirement-with-bucket-drawdown-strategy
Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those in or near retirement! Listeners – if you have questions around the topics in our headlines of the week, or questions related to your investment strategy or financial plan, you can set an appointment by calling us at 251-327-2124 or by clicking calendy link on our website, gulfcoastfa.com. It’s in the upper right-hand corner. It’s a free, no pressure, no obligation meeting.
Alright folks, coming up next : Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned!
Segment 3 – Josh’s Crystal Ball and Big Mouth:
Welcome back! Your host Josh Null here, along side co-host Michelle Lee. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Sometimes I feel so strongly about something that I talk about it publicly, on the various podcasts and radio shows I’ve had, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me beat my chest or maybe…eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth. Alright Michelle, what’s first?
1. Alright Josh you’ve stated that based on your previous real estate and construction experience, high interest rates would slow down construction and home sales more than what realtors were anticipating, especially those that started their careers after 2009. With recent reports showing that existing home sales have dropped to their lowest pace since October 2010, with the percentage of new home buyers plunging while the percentage of all cash buyers jumping, what’s your crystal ball got to say about where the housing market is headed the rest of this year and 2024?
Josh: note that housing demand has a local touch to it, that is, Baldwin Co is probably holding way stronger than many parts of the nation, but list high mortgage rates and the affect that has on both home buyers and potential home sellers. Contrast what happened to you in 2008/2009 with over supply to today’s lack of supply, that we need more housing, and density! That is why housing prices are still high compared to the crash, but that is a produce of scarcity and not healthy buying and selling. Realtors are in for a slog.
2. Josh we usually talk about where opinions that came out of your big mouth were right or wrong in the segment, so let’s mix it up with a prediction. During 2023 you’ve made some major changes to your office space and to the service offerings of Gulf Coast Financial Advisors. Would you mind detailing what those changes were, why you made them, and more importantly, what you think it will do for your business the rest of this year and into 2024?
Josh: Talk about where GCFA started, the office manuevering, opening OB, new FH office, adding tax and estate planning, etc. Lots happened in 2023, lots more will happen in 2024, PCola
3. Alright, last one Josh, let’s do one more prediction, this time jumping to macro look at the economy. The Federal Reserve meets again next week. At their September meeting, it was decided to keep rates steady at 5.25% to 5.50%, which is considered a “hawkish” pause to provide some relief for the banking sector and stock market. However, many analysts are predicting that the Fed will raise rates one more time either next week or at their December meeting. What’s your crystal ball have to say about rate increases this year, and I’d like to hear what you think about next year. We’ll save this bit so we can hopefully come back later and make fun of your big mouth!
Josh: Talk about the difference between Alan Greenspan and Jerome Powell, particularly the stock market, how investors have been conditioned to expense the Fed to the rescue, talk about how investors need to look at he other side of the coin, particularly those in or near retirement, and how 2% inflation goals will have to quietly go away at some point.
Well listeners, I hoped you enjoyed a peak behind the curtain on how I form my opinions and predictions, and more importantly, that I’m willing to admit when I am wrong. Which isn’t very often, but still. Now, to our listeners that have more questions the various investments and topics we discussed in this segment, we invite you to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com.
Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, a thank you to our awesome radio station 106.5, many thanks to the provider of our show music, local band Sloth Racer, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well. Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null!
Disclosure:
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management ("PCWM") and Qualified Plan Advisors (“QPA”). Certain services may be provided by PCIA affiliates. In this format, Josh Null provides general information, not individually targeted personalized advice, and is not liable for the usage of the information provided. Exposure to ideas and financial vehicles should not be considered investment advice or a recommendation to buy or sell any of these financial vehicles. This information should also not be considered tax or legal advice. Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.