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When Is Bad News Actually Good News

When Is Bad News Actually Good News

December 22, 2023


Can a car accident actually be a good thing?  How about falling off a ladder and breaking a hip?  Can that be a good thing?  Breaking a tooth?  Losing your wallet?  Getting stuck in traffic?  Missing your flight?  Can any of these be a good thing?

 

Heck yes, bad news can be good or good news can be bad.  You may have heard stories like the guy who fell off a ladder (he had no business being on) and breaking a hip.  The hip x-ray and MRI led to discovering he had cancer, which led to early treatment that gave him a much longer life.  Please read further to learn how this relates to your money. 

 

Sometimes news like “consumers continue to spend” can make the stock market go down.  Why?  The good news is bad for the stock market.  Why?  Or, a business lays off 10% of their employees due to reduced demand for their product and the stock price goes up?  Why?  Bad news for the company is good news for the stock.  Why?

 

The answer is simple yet at the same time complicated.  Allow me to give the simple answer first.

 

Did your mother ever tell you that too much of a good thing can be a bad thing?  Too much ice cream can make you sick to your stomach.  Too much time in the sun and a great tan can lead to skin cancer.

 

It is the same with the economy and the stock market.  As an example, consumer spending is roughly 70% of our economic growth.  Increases in consumer spending is really good news during a recession or in times of low inflation.  This kind of good news usually helps the stock market.  However, increased consumer spending during a period of inflation leads to more inflation, which leads to higher interest rates.  Under these conditions increased consumer spending is too much of good thing and therefore a bad thing.  There are plenty of other examples but I hope you get the idea.  The following items are specific examples we are currently experiencing. 

 

A short eighteen months ago, inflation was roaring at 9%.  Currently inflation numbers are from 3.1% to 4% depending upon which factors you consider, so, the fact that inflation is close to three is great news.  It is still not the Federal Reserve’s target rate of 2%.

 

Lowering inflation is a bit like a weight loss plan.  The initial pounds come off quickly while the last 10% of the target loss can be much more difficult.  The same can be said for inflation.  The drop from 9% to 3 or 4% occurred rather quickly.  However, the decline to 2% could be much more difficult.

 

The goal of the Fed is to reduce inflation to the 2% target while at the same time maintaining “full employment” (sort of like it is now) and not creating a recession.  If you are old enough to remember the Ed Sullivan Show and the act with the spinning plates, the objective was to get numerous plates spinning on narrow spindles without allowing any to crash to the floor.  The performer started with one plate and as he increased the number of plates the initial plates would begin to wobble and he would rush to get them spinning faster.  This, in so many ways, is what the Fed is doing today.  They need to keep the economy spinning, maintaining full employment all the while keeping the economy from entering a recession and unemployment from surging.

 

Growth in hourly wages ranged 1% to just over 3% during 2014 through 2019.  During Covid, wages jumped by over 5% in 2020.  This was great for an economy recovering from the Covid recession.  However, for the first eleven months of 2023 hourly wages have grown by just over 4%.  Is this good news?  Yes, but it is still inflationary so that is bad news.

 

Job openings fell to 8.7 million in October 2023, a decline of 800,000 open positions compared to September’s job report. At the same time, 5.3 million Americans are looking for work. That means there are still nearly 1.6 jobs for every unemployed person seeking work.  In “normal times,” one job for each person looking for work is preferred.  So, is this good or bad news? Actually, it is a bit of both.  A decline in job openings is good news for the inflation fight…. but having more job openings than job seekers makes it harder for employers to hire and subsequent pressure to increase wages to attract employees.  I believe the Fed is encouraged by the decline in job openings.

 

Gross Domestic Product (GDP), a measure of the nation’s economic output, grew by an annualized rate of 5.2% in 2023’s third quarter, the fastest pace of growth in more than two years.  Good news or bad?  Yes, but... economic growth is not always good.  Current growth of over 5% is great except when the inflation is still too hot.  Hot economic growth in this case is bad news because the Fed wants the economy to cool off to lower inflation but not enough to cause a recession.

 

If you are confused, you are not alone. This is complicated stuff …. it is a bit like Goldilocks and the Three Bears…. You don’t want your porridge too hot, or too cold…. you want it just right.  Cooking is equal parts science and art.  So is economic / monetary policy.

 

The economy was growing at about 2% per year from 2009 through 2019.  Then the Covid pandemic appeared and stopped the world/global economy, causing unemployment to go from 4% to 10% (with 10M people out of work).  In an effort to keep the economy from collapsing, the Fed cut interest rates to almost zero and Congress provided stimulus checks to people and businesses to keep the economy from collapsing.  The result was probably the shortest recession in history.

 

So maybe too much stimulus?  Perhaps, but no one had a crystal ball to see how things would turn out.

 

Shortages of product to sell, not enough employees, not enough raw materials and people with money to spend leads to guess what???  INFLATION!!  All the way from 2% to over 9%.

 

The Federal Reserve’s reaction to 9% inflation was to increase interest rates.  Seven times in eighteen months from almost zero to 5.5%.  All intended to slow the economy to make it more expensive to borrow.  If people borrow less, they spend less, and the economy slows.

 

The plus side of this is that money in money markets, savings, CDs etc. are now finally earning meaningful interest for the first time in almost 15 years.  This is good news for savers but really bad news for borrowers.

 

The downside of the higher interest is the cost of credit card borrowing, car loans, and mortgage rates.  These higher rates are producing the intended result.  It is definitely more expensive to spend borrowed money and hopefully the consumer will back off and slow down on spending – at least spending borrowed money.

 

The Federal Reserve did not increase rates when they met early December.  They even seemed to indicate rates could decline up to three times in 2024.

 

It seems like the stock and bond markets think this means rate cuts will begin sooner rather than later.  However, I believe the Fed will be patient, cautious, and even slow to begin reducing interest rates.  If the economy is still growing at 5% and unemployment is around 4%, the Fed will not be motivated to cut rates. 

 

Does this still mean we could have a recession?  Could be …. Probably not.

 

Does this mean unemployment needs to go up?  Not really.  However, slower wage growth is bad for the consumer but good news for inflation, employers and their profits.

 

Will I be able to get a 3% mortgage in the future?  To be honest, I hope not.  Rates for 30-year loans that low were a sign of a very sick economy that needed super-low interest to even maintain its then anemic growth.  Interest rates are often a great indicator of economic health with the ten-year Treasury Bill which is used as an oft-quoted measure.  From the Great Recession of 2008 through the first half of 2019, the 10-Yr T-Bill was around 3% --- this means a reasonably healthy economy. 

 

When the Covid Pandemic exploded on the world, the rate on 10-Yr T-Bills dropped to 0.60% in April and May 2020.  That meant that the economy was so weak it needed life-support and as a result money became really cheap (Fed lowered rates) in an effort to keep the patient (economy) alive.  With money so cheap, borrows felt confident to borrow more and more money…and spend, spend, spend.  The result is inflation. 

 

To lower inflation, the Fed increases interest rates making borrowing more expensive and therefore, people and businesses spend less because of the higher cost….and the economy slows.

 

Can you begin to see the cycle? 

 

Interest rates, the economy, the weather and seasons all rotate through cycles.  Some years the winters are long and cold, other summers are dryer but it can always be said that August and September will be hotter than January and February just as interest rates are low to boost a slow economy and then higher to slow down a heated economy.  Interest rates both are a cause and an effect in this cycle.  Through all this, the stock market is first reacting to all the news, next anticipating what the news will be, then excited or maybe disappointed when the actual result is better or worse than what they had hoped, plotted or predicted.

 

At the end of the day, the most important factor affecting the stock market growth is company earnings (fancy word for profit).  If a company has more profit, it has greater value.  With greater “value,” the price of the company’s stock should be expected to go up.  And your account statement goes up.

 

Remember, it is a cycle.  Historically, (remember, no guarantees) the stock market is up four of five years or eight of ten years.  Markets may go up for the next three years, or not; or up four of the next five, or not; or up for the next five, or seven, or not; the market could go down the next two years, or not.

 

What I am attempting to say, is there is no way to reliably project short-term economic events or stock market performance.  However, the longer your time-frame, the more predictable the outcome.  Again, no guarantees.  However, I can look to history and then ask myself of the probability of history repeating itself?

 

Please give us a call or send an email if you have comments or questions.  Happy Holidays, Merry Christmas, Profitable New Year.


Wollman Wealth Designs, Inc is a financial planning and investment advisory firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.

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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.