We invite you to watch our latest video, Agili Market Insights: Third Quarter 2023 Views. A full transcript of the video, featuring Michael Joyce, is below in italics.
Agili is Selective with Investment Decisions in both the Bond Market and the Stock Market
Hi this is Michael Joyce from Agili, Your Personal CFO, and I’m pleased to share with you our thoughts and viewpoints for the Fall of 2023.
James Carville and the “Bond Vigilantes”
Back in the early 1990’s, at the beginning of President Clinton’s administration, his political advisor, James Carville, made a comment, “I used to believe if there was reincarnation, I’d like to come back as the President or the Pope or a .400 baseball hitter – but now I want to come back as the bond market, because you can intimidate anybody.” And what Carville was talking about at that time was if there was any sense that bond market participants saw signs of fiscal irresponsibility, they’d sell off bonds which would hike up interest rates and that would cause a return to more fiscal sanity. And for a couple of decades, the “bond vigilantes” as they called them, have kind of been in hibernation. But now that the national debt is about 120 percent of gross domestic product (GDP), the bond vigilantes have recently come out with a vengeance.
Higher Interest Rates
Impact of Higher Long-Term Interest Rates on the Bond Market
We have seen long-term interest rates, just over the past couple of months, go up quite a lot, which has had wide-ranging impacts. But, from a positive standpoint, the sharp rise in long-term interest rates over the past two months has been really good for us when we’re buying bonds for our clients. With very short-term Treasury bills, we’re still getting rates in the 5½ percent range. With shorter-term corporate bonds in the 1½-year to 3-year range, we’re seeing bonds that we think have very little risk of impairment that have yields of up to 7½ percent. So, I’m very pleased with that.
But in other parts of the investment world, it’s not so good news – including in the bond market. If you had invested in a 10-year Treasury note three months ago, on a total return basis, you’d be down about eight percent at this point. Now, you can wait another 9¾ years and you’re going to get your money back, but as interest rates have gone up, bond prices have come down and that has a bigger impact on longer-term bonds.
How Higher Interest Rates Are Affecting the Stock Market
Also, in the stock market we’ve seen a lot of impact [from] this (higher interest rates). As we’ve talked about, most investors invest in stocks for the long-term. So, the valuation of any company, whether it’s Apple or Verizon or General Electric or Agili is the value of all its future cashflows discounted back to the present value. So, we don’t know what all the future cashflows are going to be: That’s why stock prices move around all the time – because investors’ viewpoint of future cashflows is constantly changing. But we do have a good idea what the discount rate should be. And it should be a longer-term Treasury note rate – and that has gone up a lot – so if that rate has gone up, that means you’re discounting future cashflows with a higher discount rate, which would be a lower valuation.
Impact of Higher Interest Rates on Commercial Real Estate
You can see a similar impact happening in the real estate markets – commercial real estate markets – where capitalization rates are going up which again discount cashflows, and so on.
Why Are Interest Rates Higher?
And the reason why interest rates have gone up – to go back to the “bond vigilantes” – is because there’s been a lot of Treasury issuance just over the last couple of months, more than what investors expected. And this increase in supply did not have a commensurate increase in demand. So, it’s simple economics. If supply goes up and demand doesn’t go up to correspond with it, that means that prices fall, and in this case, interest rates go up.
More Stock Market Analysis
So, we can see this in the stock market as well where a lot of the highflyers from earlier in the year are still up a lot for the year – but they’ve had a pretty tough couple of months. In fact, the entire stock market had really rough sledding in August and September.
But, if you look at the stock market, it is still a little bit pricey. However, there are large pockets of the market that are really a pretty reasonable value. If you take out the seven stocks that contributed over 70 percent of the returns of the S&P 500 in the first half of the year, you’ll find that the stock market is trading pretty reasonably. There’s stocks of companies that are trading at very low valuations compared to their future prospects: A lot of them paid very nice dividends that are covered with plenty of cashflow – and in some cases, they’re trading at multi-year lows. So, it may not be the time to back up the truck and load up with stocks, but you can be selective in the stock market and find good values to hold onto for the long-term.
Agili Is Selective with Bonds
I would say in the bond market we’ve always been somewhat selective and that is paying dividends – or interest – for us right now. As the bonds that we invest in that are very short-term bonds, for the most part, are not as sensitive to interest rate movements and have done quite well, even as the bond market has gone down in recent months.
International Markets Negatively Impacted by Strong Dollar
International markets have also had rough sledding over the past couple of months. And the big culprit [for] that is a big bounce back in the value of the US dollar – which is really a headwind for a lot of the foreign markets, particularly the emerging markets. It’s good if you’re going to travel abroad. I’m going to go to Italy in a couple weeks, so I want the dollar to be very strong – and then it can fall after I get back from Italy. But for the most part, it is not really that good for foreign investment markets.
End of Year Financial Planning
Now as we’re coming into the Fall, it’s also a time to think about some of the things that you need to be doing between now and the end of the year. And your financial strategist at Agili can help you with this. But some of the things that you should be looking at doing are to look at some tax projections to see approximately where your taxes are going to fall between now and the end of the year – because there are planning opportunities that revolve around your tax projections. Some of these could include whether to convert some IRAs into Roth IRAs. We know that clients who are over a certain age have to take required minimum distributions from their retirement accounts. So, there’s really a plethora of things to look at between now and the end of the year – and now’s the time really to get started in looking at these opportunities.
Agili’s 30th Anniversary Celebrations
Last, I want to say that Agili celebrated its 30th anniversary in March – the beginning of March – and we are now in the midst of celebrating with our clients some anniversary dinners both in Pennsylvania and Virginia. And I want to take this opportunity to really express my gratitude for our clients who have become clients more recently and for our clients who have been with us for 30 years. It has been really a pleasure and an honor to have served you over the years – and I’m hoping to serve you for another 30 years.
If you do have any questions on our thoughts and viewpoints for the Fall of 2023, please contact your financial strategist at Agili or contact me. You can also follow us on social media or look at our website for updates. Thanks, and have a great day.