Donna Cournoyer, Author at Moore Advisors

July 2023 Market Recap: Stocks Heat Up

Stock market heat stayed high in July. Better-than-expected economic growth, declining inflation, and receding recession fears were supportive of the “new bull” which began last month.

For the month of July, the S&P 500 index of large company US stocks rose by 3.3%. Foreign stocks climbed by 2.7%. Year-to-date as of July 31, US stocks gained 20.6% and foreign stocks were up by 12.6%

However, stronger-than-expected economic growth, along with the possibility of interest rates needing to stay higher for longer to cool inflation, put downward pressure on the bond markets.

The Bloomberg US Aggregate Bond Index fell slightly last month (less than 0.1%). Through the end of July, the bond market return year-to-date was 2.25%.

Below is a summary of July returns.

Donna Cournoyer In Reading Recommendations

The American Spirit

David McCullough thought expansively about and cared deeply for America. The Pulitzer Prize-winning author and historian passed away last summer in Hingham, MA.

Best known for his biographies presidential (Adams, Truman) and structural (Brooklyn Bridge, Panama Canal), McCullough also lectured and presented extensively on a range of topics for more than a half century and gave addresses in all fifty US states.

In The American Spirit: Who We Are and What We Stand For, McCullough presents fifteen speeches he delivered in between 1989 and 2016.

In the introduction, Mccullough says: “Yes, we have much to be seriously concerned about, much that needs to be corrected, improved, or dispensed with…

But the vitality and creative energy, the fundamental decency, the tolerance and insistence on truth, and the good-heartedness of the American people are there still plainly.”

On this Independence Day, may you and your family see and feel good-heartedness and find ways to celebrate the best parts of the American spirit.

-RK

Donna Cournoyer In College Planning

Preparing to Pay the First Tuition Bill

If you are a parent of a young adult who will soon head off to college for the first time, you have likely had an emotional and hectic year. Making a commitment to a school for your student’s education is a big step.

Congratulations on navigating a complex process and reaching one of life’s major milestones!

One of the more important communications from your student’s school, arriving soon, will be the first semester bill for tuition, and room and board. Any merit scholarships or aid awarded to your student should show as a pending credit on the bill.

Schools generally send two bills per year, and payment due dates are usually around the beginning of August for fall semester and December for spring semester.

Early summer is an appropriate time to review your college financial plan, and a good place to start is by considering all available resources, including:

529 plan balances and other savings
Gifts from relatives
Private scholarships awarded to your student
Flexibility in your budget for making monthly cash payments
Loans, including Federal student loans and private loans

If loans will be part of your family’s financing picture, it’s wise to consider using the Federal Direct Stafford Loan – all students are eligible.

Loans maximums are set by the U.S. Department of Education, and they range from $5,500 for the freshman year, to $7,500 for the senior year.

The federal student loan benefits include:

fixed interest rate (and likely lower than a private loan)
no credit and no co-signer needed
multiple repayment and forbearance options during repayment
six-month grace period after graduation (or continued deferment if the student is in a qualifying, half-time graduate program)
Public Service Loan Forgiveness programs

Of course, it is a personal and family decision whether or not your student will borrow to help pay for college.

For access to Federal loans, you and your student must complete the Free Application for Federal Student Aid (FAFSA).

Even if you don’t want your student to have debt after graduation, Federal student loans are still worth considering, because:

taking the federal loan will help your student establish a payment history and a credit score
you’ll have the option to pay off the loan at graduation, or sooner
if you have the need to appeal for financial aid while your student is an undergraduate (due to a job loss or other unfortunate circumstance), the college’s financial aid officers are likely to look more favorably on your situation if your student has previously accepted the ‘self-help’ loan

For more information on Federal student loans, yearly loan limits, interest and payment calculators, and Public Service Loan Forgiveness, check out:

Donna Cournoyer In Investment Strategy

Americans Love American Stocks

American investors seem to prefer to hold stocks of American companies over shares of companies that are based elsewhere in the world.

According to a recent article in The Economist magazine, American fund investors hold just a sixth of their equity allocation in funds that invest in non-US companies.

Compare this to the composition of the global stock market, where nearly 40% of the total value of the global stocks reside in companies that are headquartered outside of the United States.

Are investors who eschew foreign stocks on to something?

During the past fifteen years, stock allocations heavily weighted to US shares have outperformed more balanced US / foreign stock allocations.

In the chart below, from JP Morgan Asset Management, the grey areas indicate US stock market outperformance.

But US-only stock fans should beware the purple!

Shares from non-US companies (EAFE stands for Europe, Australasia, and the Far East) have outperformed US shares for meaningful stretches in the past, as the purple sections of the chart above shows.

Researchers at AQR, a US-based investment firm, published an article in the June edition of the Journal of Portfolio Management which argues that, despite the current lengthy period of lagging US stocks, the case for international diversification remains strong.

A key point in the AQR article is that US stocks have gotten much pricier than shares of foreign companies (using time-tested means of valuing stocks), so investors are likely to be rewarded in the future by ensuring that their stock allocation contains shares of foreign companies.

Picking the ‘right time’ to buy or add exposure to any asset class is a difficult game.

But JP Morgan’s and AQR’s research make a strong case that a stock allocation incorporating a healthy portion of non-US stocks is likely to be good for your portfolio in the years ahead.

Donna Cournoyer In Economy

American Banks Ace the Test

In my April letter, I discussed the turmoil in the banking sector resulting from risk management shortcomings that led to failures of several sizable US deposit-taking institutions.

I concluded with the following statement: “if summer arrives without additional failures, I’ll feel comfortable calling “all clear”. Summer has arrived, and I’ll stand by that “all clear” claim.

As part of their regulatory responsibilities, officials at the Federal Reserve conduct an annual stress test for the largest US banks, designed to evaluate the resiliency of the banking system under challenging economic conditions.

The process is similar to an exercise stress test for humans. The regulators’ treadmill for banks include the following assumptions:

severe global recession
US unemployment rate rising to 10%
commercial real estate prices declining by 40%
house prices declining by 38%

The bank stress test was developed after the global financial crisis and was first applied in 2011. The assumptions are severe. For some time after 2011, large lenders struggled to earn passing grades.

But good news: all twenty-three large US banks that were recently evaluated passed their stress tests. This means balance sheets remain strong enough for the banks to continue to lend to households and businesses for the duration of a downturn.

You can read the details of the test on the Federal Reserve’s website at: Dodd-Frank Act Stress Tests 2023.

Although this news is unlikely to translate to large stock price gains, it does indicate that the financial market plumbing is in good working order and that the bank problems from earlier this year likely have been contained.

Donna Cournoyer In Market Updates

June 2023 Market Recap: Sheepish Bull

Sheepishly, a bull emerged in June.

While investors’ worrying about the next economic downturn may give the National Pastime a run for its money, so far this year falling stock markets have proven to be “so 2022”.

A bull market occurs when a stock index rises more than 20% from its most recent low. For US stocks, the recent low point occurred in October. The recovery, which continued during the second quarter of 2023, means US large-company stocks have attained bull status.

For many investors, the mood may feel more cautiously optimistic than wildly celebratory.

Significant ground has been regained, with US large-company stocks up nearly 17% this year. Even so, stocks are still lower today than when compared to the all-time peak in early January 2022, due to the 18% downdraft experienced last year.

Bonds are also in the black in 2023, but the previous three months proved more challenging, as interest rates moved higher (and bond prices declined). The Bloomberg US Aggregate Bond Index fell by 0.94% in the quarter ended June 30. Year-to-date, bonds returned 2.25%.

Here’s a quarterly stock and bond returns recap, going back to the beginning of 2022.

Donna Cournoyer In Reading Recommendations

The Science and Art of Longevity

Peter Attia is a physician who focuses on longevity. In his recent book, Outlive: The Science and Art of Longevity, he explains that longevity has two components: how long you live, which is your chronological lifespan, and how well you live (the quality of your years), which is called healthspan.

His goal is to create an operating manual for the practice of longevity. His belief is that, with time and effort, individuals potentially can extend their lifespan by a decade and their healthspan possibly by two decades.

Specifically, Attia’s research focuses on actions that individuals can take to mitigate risk associated with four chronic diseases of ageing: heart disease, cancer, neurodegenerative disease, and type 2 diabetes.

Attia was recently profiled in a New York Times Magazine article: Want to Live Longer and Healthier? Peter Attia Has a Plan. He also hosts a podcast entitled The Drive, which addresses personal health and longevity topics.

As a complement to this reading, I recently came across the map below in The Daily Shot, an economics newsletter.

I was surprised to see such a wide dispersion of life expectancies across regions of the US.

In its most recent report on life expectancy in the US, the Centers for Disease Control and Prevention (CDC) pegged life expectancy for a newborn at 76 years.

The CDC report, released in August 2022, states that US life expectancy experienced a 2.7-year decline during the 2020 – 2021 period due to the pandemic.

JP Morgan has also published additional longevity-related data that you might find interesting:

65-year-old females today have an average life expectancy of 84.5 years
Non-smoking females in excellent health have a 1-in-3 chance of living to age 95
65-year-old males today have an average life expectance of 81.9 years
Non-smoking males in excellent health have a 1-in-5 chance of living to age 95

Longevity is a key input to the process that we use when we build financial plans for clients, and understanding longevity trends in the US is a good starting point.

In the end, though, individual factors such as family history and lifestyle choices are likely to be more informative when responding the question: “how long do you expect to live?”

If you are interested in extending your lifespan and healthspan, it’s encouraging to know that there are concrete steps, such as the ones Attia suggests, which you can take that are likely to ‘bend the curve’ in your favor and advance the goal of a long, healthy life.

-RK

Donna Cournoyer In Financial Planning

Have a Social Security COLA and a Smile

Social Security recipients could get a 3.1% increase next year in their benefit, compared to the 8.7% Cost of Living Adjustment received in 2023.

The Social Security Administration will announce the actual cost of living adjustment for 2024 in October.

To arrive at the figure, SSA will compare the average consumer-price index from the third quarter of 2023 with the average data from the same period last year.

The Senior Citizens League, a nonprofit organization, estimated the underlying data that goes into the calculation to arrive at 3.1% and will update its projection monthly until the actual adjustment is announced in the fall.

In its May press release, the Senior Citizens League posted some interesting statistics on inflation, specifically regarding the fastest growing costs for older Americans.

The note highlights that between January 2000 and February 2023, Social Security COLAs increased benefits by 78%, averaging 3.4% annually, while the cost of goods and services purchased by typical retirees rose by 141%, averaging about 6.2% annually over the same period.

For many retirees, Social Security income is significant, but only part of their total income picture.

However, this information highlights the pernicious effect of inflation, the need to keep an eye on recurring expenses, and the importance of a long-term financial plan that takes into account the effects of rising costs over time.

Donna Cournoyer In Economy

Debt Ceiling Relief and Debrief

Congressional leaders came to an agreement in late May to suspend the debt ceiling until January 1, 2025 – removing the near-term risk of a US default and sparing the American people political wrangling on the issue for the next 18 months or so.

According to projections made by the Congressional Budget Office, the Fiscal Responsibility Act of 2023 reduces budget deficits by $1.5 trillion over the next 10 years, mainly by imposing caps on discretionary spending.

In terms of the Federal budget, roughly 1/3 is discretionary and funded though the annual appropriations process, where Congress must pass bills to provide money to carry out the programs.

The other two-thirds of the Federal budget comprises mandatory spending, such as Social Security, Medicare, and interest on the federal debt. Mandatory spending is ongoing and occurs each year absent a change in an underlying law that provides funding.

The debt ceiling deal does little to put our federal finances on a path of long-term sustainability, since the budget is far from balanced. But it does ensure our federal obligations will be met.

And thankfully a government-induced, calamitous outcome for the financial markets has been avoided.

Donna Cournoyer In Investment Strategy

Should Investors Fear Recession?

Global Pandemic, Supply-Chain Breakdown, War in Europe, Inflation Flare Up, Crypto Crash, Bank Collapses, and US Debt Ceiling Debacle. A lot has been thrown at the financial markets, and at investors, during the past three years.

Stock and bond markets buckled in 2022, but eventually stabilized. So far this year, the tone and direction of the financial markets has generally been constructive. And investors have remained resilient.

As we look toward the back half of 2023, a main concern is: will the economy fall into a recession?

Some prognosticators are convinced that recession is the next shoe to drop, and that an economic downturn will lay the financial markets low once again.

David Rosenberg, a prominent Wall Street economist who currently runs his own research shop, is one of the economic bears.

In Rosenberg’s assessment, the odds of a deep recession starting in 2023 are 99%, and the stock market is likely to decline by 30%.

Morgan Stanley’s chief US equity strategist, Mike Wilson, is another naysayer.

In Wilson’s view, lots of economic uncertainty and over-optimism regarding corporate profit growth (meaning companies’ results are likely to disappoint in the quarters ahead) are cause for pessimism. He sees stock price declines ahead.

Billionaire hedge fund founder Cliff Asness, of AQR Capital Management, sees the possibility of a recession that “wouldn’t be mild” and concludes that stocks “are a scary place” to be.

These are smart and successful people (at least by Wall Street standards), so should we heed their warnings and steer clear of stocks? Or at least own fewer of them, if we believe a recession is nigh?

Implied in that question is the assumption that stock prices fall when a recession hits. So, is this true?

The answer is: sometimes, but not always. More accurately, the answer is: recessions have coincided with stock price declines half the time.

Researchers at Renaissance Investment Management have dug deep into the data and have concluded: timing your stock market exposure around a recession is harder than you might think.

The table below, from Renaissance, shows the twelve recessions that occurred in the post-World War II era along with US stock market performance during the recessions.

Interestingly, the stock market rose in six of the twelve observances of economic contraction.

So even with perfect economic foresight at the start and end of a recession, selling stocks at the beginning of a recession and buying them back at the end would have resulted in being better off (by preserving capital) only half the time.

In the other half, the investor with prescience regarding economic events would have foregone stock market gains.

The historical record is worth knowing, especially if you’re prone to worrying about your portfolio when the economy slows down. One interpretation is that market timing can work – if you’re lucky.

But a better approach for long-term investment success (and one that doesn’t require luck to yield satisfactory results) is determining an appropriate asset allocation plan for your individual circumstances – and sticking to it.

Donna Cournoyer