Hi. This is Michael Joyce from Agili, Your Personal CFO, and I’m pleased to share with you our thoughts and viewpoints for the Spring of 2023.
Agili’s 30th Anniversary — and Historical Perspective on the Markets
Just a few weeks ago, Agili marked our 30th anniversary of our founding. And 30 years in, we are facing a wall of worries and concerns. We have inflation, we have recession concerns, we have the Russian invasion of Ukraine, geopolitical tensions with China, political divisiveness, and even a bank drama.
But if you think about it, over the past 30 years, there’s always been worries and concerns. We faced Y2K, we faced the Dot-Com Bust, we faced 9/11 and other terrorist attacks, we had a financial crisis, we had the Greek default which almost brought down the Eurozone, we had a collapse in commodities prices, we had Brexit, we had the worst pandemic in 100 years. So, we’ve overcome all of those and I think that gives optimism for the future – that we will come up with innovation that will allow us to continue to improve as a society and create more wealth.
If you think about 30 years ago when Agili was founded, we had dial-up modems, we had cell phones that were the size of a very large basketball sneaker, and you only got reception in certain areas. At that time, when you talked about the cloud, you had to look up in the sky. And think about the things that we didn’t even think about that would improve our lives since then. And that’s been reflected in the investment markets. Since 1993, the stock market is up tenfold, over that time. And I’m optimistic that going forward, we will have that same type of innovation that will power us into the future – and will allow us, for our clients, to help them fulfill their long-term goals and objectives.
Recent Bank Drama
But let’s talk about some of the current concerns. Let’s start with the bank drama first. This is something that came up in mid-March when a couple fairly large banks that had grown quite rapidly, had a run on the banks and failed. Now, this is very different than the issues with banks during the financial crisis during 2008-2009. This was more akin to what happened in the early to mid-80s. Basically, the banks had a mismatch of assets and liabilities. Silicon Valley Bank, which was the first one to really set this off…they had had some depositors that were pulling some money out, so they had to sell some of their government securities portfolio – which was down because interest rates had gone up. And they sold it for a $1.8 billion loss. Now, these were all securities that were without risk, essentially – they were all US government securities. But on a market-to-market basis, they were down, and that caused some panic. And there was a run on the bank. But the Federal Reserve has put in a program that now allows banks to borrow based on the value of their government securities portfolio at par value. And this will really mitigate the possibility of a bank contagion.
I mean, there are going to be some impacts from this – because there were a lot of deposits that moved from banks, medium-sized, regional banks, small banks and into the eight largest banks in the United States that are considered to be too big to fail. And if they have less deposits, that means they can’t lend money out, so that could have some economic impact. But we don’t see a contagion.
Inflation is clearly coming down from its peaks. But this is very different inflation than we had a year ago or 18 months ago that was really driven by goods. You know, there was a lack of supply of goods, and there was excess demand from people who had gotten stimulus checks and whatnot – and that caused high goods inflation.
What’s causing inflation now is very different. With goods, we’re seeing that a lot of consumer goods — the prices have stopped going up. And it wouldn’t surprise me, given excess inventories, if the prices of some start to come down. But what’s driving inflation right now is service sector inflation. And that’s mainly driven by wages. And if you think about it, as the Fed raises rates, it has less impact on the service sector. A CPA firm is not going to be as interest-rate sensitive as a car manufacturer because they don’t have to borrow to build plants and so on.
So inflation — it is coming down, but we’re not sure it’s going to come down that fast. The Fed is probably going to raise rates maybe one or two more times at a slower pace than they had earlier in their tightening cycle. But for those that think the Fed is actually going to start lowering rates by the end of the year – we’re not in that camp at all. We think when the Fed stops raising rates that they’ll keep rates higher for a while to get inflation more toward their two percent annual target.
And while the service sector is the source of higher inflation right now, it’s really the segment of the economy that has kept us out of a recession. I mean, there are some segments of the economy that are already in a recession. Housing, cars, durable goods. Those are all in a recession right now, but the service sector has been pretty resilient and has kept us out of a recession at this point in time.
Now market valuations are about in the range that we think they should be. And typically, in a year after you’ve had a bear market, which is what we had last year, you see out-sized returns – you see 20 or 30% returns in the following calendar year. We’d be very surprised if that happens this time. But based on where interest rates are and where we expect corporate earnings to be, the markets are trading in about the range they should be — could during the course of the year be 10% higher, could be 10% lower — but basically in the range that they are right now.
Bond Market Yields
We’re very happy with the yields that we’re seeing in the bond market. This is something – after having a very low interest rate environment — that we’re pleased to be getting money that we can earn a higher yield on. And this is important because, while we are very optimistic about the long-term – and we want to invest in growth assets for the long-term – for short-term needs, for short-term objectives, we want to have money being safe. And to get a nice yield while keeping it safe and secure is very important. We wouldn’t want to have to sell stocks when we’re in the middle of a 20 percent correction just to meet our clients’ cash flow needs.
The international markets have also done really well, not just since the beginning of the year, but going back to November. And if you think about what was happening in early November, the US dollar was very strong at that time. I don’t want to say it’s the strongest I’ve ever seen it, because I have seen it a little bit stronger, but not much. And since then, the US dollar has backed off a little bit. The dollar is still pretty strong. You can still go to Italy; you could go to Lake Como and rent a motorboat to find George Clooney’s house on Lake Como, but overall, that has helped the foreign markets. What had been a headwind has become a tailwind.
Tax Returns Due April 18th
Now we have to file our tax returns. The date this year is going to be April 18th. Now a lot of our clients will be filing extensions, as will I, but you still have to pay in what you owe by April 18th. And then, file your return by October 15th. So that’s going to be very important to remember to pay in at that point in time. So this is just a reminder. If you need any help, please feel free to contact your financial strategist at Agili or to contact me.
Agili’s Form ADV
I also want to mention that Agili just filed our annual amendment (ADV) with the US Securities and Exchange Commission. If you want a copy of the Form ADV, you can contact our office or you can find it online at the SEC’s website.
I’ve been very pleased to share with you our thoughts for the Spring 2023. If you want to know more about what we’re thinking, visit our website or follow us on Twitter. Thanks and have a great day.