was successfully added to your cart.

Tag

economic recovery Archives -

Lessons of the Great Recession

By | 2018, Money Moxie, Newsletter | No Comments

In January 2008, stock markets were near all-time highs, U.S. unemployment was at just 5 percent, and George W. Bush was about to sign the Economic Stimulus Act, which provided tax rebates for Americans and tax breaks for businesses. Americans were unaware that the “Great Recession” had already begun (National Bureau of Economic Research).

The consequences of excessive debt began to slowly spread across corporate America. Several companies were on the brink of failure before being saved, including Bear Stearns (March 2008), Countrywide Financial (July 2008), Freddie Mac (September 2008), and Fannie Mae (September 2008). Each of these was saved by unpopular government intervention.

Then came Lehman Brothers. It was “too big to fail,” and yet it did. At 1:45 AM on September 15, 2008, Lehman Brothers filed for bankruptcy protection—the largest and most complex bankruptcy in American history. It had over $619 billion in loans it could not repay and it marked a tipping point: a moment when investors around the world woke up to reality.

There was too much debt, especially American mortgage debt. In 2008, over 800,000 families lost their homes to foreclosure.1 In 2009, there were around 2.5 million.2 Unemployment doubled to a rate of 10 percent.3

The cost of recovery weighed on the government as it shifted the debt from overburdened Americans to the U.S. deficit (Now over $21 trillion).
The Federal Reserve lowered its rates to zero and kept them there for seven years. When that was not enough, it purchased $4.5 trillion dollars of debt—essentially injecting the American economy with money. It seems to have worked by many measurements.

As the economic recovery firmed, the Federal Reserve began to raise rates. At first, it was cautious. Now, it plans to keep going higher at regular intervals. This change may be an important shift.

One day in the future there will be another recession, but it will be different than the Great Recession.

A lot has changed in the last 10 years. Americans have less mortgage debt. The government has much more. While the housing market is strong, it does not seem to be as inflated as 2008.

For now, move forward with optimism and confidence, but don’t forget the lessons of the past. The risk of another economic downturn is real. Whether it comes in 1 year or 10 years, your personal preparation will be valuable.

 

1. “Foreclosures up a Record 81% in 2008,” CNN Money
2. “Great Recession Timeline,” History.com
3. Federal Reserve Bank of St. Louis
4. “Looking Back at Lehman’s Demise,” Wealth Management

Tags: , , , ,

Just In Case You Missed It

By | 2018, Executive Message, Money Moxie, Newsletter | No Comments

Dear Financial Partners and Friends!

How is the U.S. economy really doing? Here are a few quotes and facts regarding the past, the present, and the future.

The Past: “We Ran Out of Words to Describe How Good the Jobs Numbers Are,” (“The Upshot,” Neil Irwin, The New York Times, June 1, 2018.)

The Present: The U.S. economy jumped to an annualized rate of 4.1 percent GDP in the second quarter of 2018. That’s almost double the first quarter’s rate of 2.2 percent. This is the fastest rate of growth since 2014. This is great news for all of us!

The Future: The following quotes are from Elizabeth MacDonald’s, “Evening Edit,” Fox Business News, July 19, 2018. MacDonald said,“(Here are) CEO commitments for more jobs over the next 5 years.”

FedEx®: “FedEx® will train or reskill 512,000 people over the next 5 years.”

General Motors®: “General Motors® is proud to offer 10,975 workforce training opportunities.”

The Home Depot®: “The Home Depot® is pleased to provide enhanced training and opportunities for 50,000 associates.”

Raytheon®: “Tom Kennedy from Raytheon® and we pledge 39,000 enhanced career opportunities.”

The U.S. economy is doing well. As a result, most Americans are doing well. Remember this: Your financial success is our passion and our mission at Smedley Financial.

Best Wishes,

Roger M. Smedley, CFP®
CEO

Tags: , , , ,

Trade Helps Make America Great

By | 2018, Money Moxie, Newsletter | No Comments

Harley Davidson®, the iconic American motorcycle company, plans to close a Kansas City factory and lay off 800 workers. It will consolidate operations and open a factory in Europe. This surprising announcement came despite actions meant to support U.S. manufacturing and jobs. It is an unintended consequence and casualty of our current trade war.

Trade promotes global peace, grows our economy, and brings greater opportunity to the greatest number of people. The United States has experienced huge benefits over the last century because of increased trade, and Americans want to continue to compete fairly in the global economy. No matter how tough the trade talk, Americans should want more trade, not less.

The trade war is a tactic for negotiating better agreements. Hopefully, we get there soon because we are only beginning to see the effects and the uncertainty.

Don’t Let A Trade War Become A War On Trade
One of the greatest risks the United States has taken is to raise tariffs on so many countries at the same time. This year, the United States has raised tariffs on China, India, Mexico, Canada, and members of the European Union. These have reciprocated U.S. action and have quietly been making better agreements with each other.

China created the Asia Pacific Trade Agreement and as of July 1, it lowered tariffs on approximately 10,000 goods coming from trade partners, including South Korea, India, and other regional countries. China is considering similar agreements with Mexico, Canada, Brazil, and Europe. Japan recently signed its own “free-trade” agreement with the European Union.

The forceful approach could backfire just as it has in the case of Harley Davidson® and Whirlpool®. Farmers, for example, are also feeling the pinch. With fewer international buyers, the value of many crops has fallen. They have been offered a bailout, but seem more interested in farming than handouts.

Can We Emerge As Winners?
The United States is engaging in a risky tactic in order to obtain something quite reasonable: fair trade and protection of our intellectual property.

To make it happen, we need to start winning by focusing on more friendly trade partners. The more good agreements we get, the easier it will be to get the final countries to negotiate a fair deal.

Trade allows Americans to focus on what we do best. This specialization allows for higher innovation and new technologies. It leads to less expensive food and better prices on items that we want. Specialization also makes us more productive so that we can earn more working. All of this translates into a higher standard of living for most Americans and a more peaceful society.

Tags: , , , , ,

Rising Rates Will Impact: Your Income Your Spending Your Investments

By | 2015, Money Moxie, Newsletter | No Comments

Federal Reserve (Fed) members are making plans to raise interest rates and it is going to affect your wallet! Individuals do not borrow from the Fed, so you may be wondering how it could impact you. The Fed’s rate increase will start economic ripples that are going to hit your income, your spending, and your investments.

The Fed
The Fed was established by Congress and signed into law by President Woodrow Wilson on December 23, 1913. It has two objectives: seek maximum employment and maintain stable prices. (It is a highly sophisticated organization with over 300 Ph.D. economists.)

In simpler terms, the Fed is less like a surgical tool and more like a hammer. A hammer is blunt and its impact can be powerful. It doesn’t perform a lot of functions, but it is extremely useful for the right problems.

The Fed has power to perform a limited number of actions. It can strike hard and fast because it does not need congressional approval and its officials are not elected. The Fed is not focused on individuals as its actions have worldwide implications.

Why the Fed Changes Rates
The purpose of changing rates is to influence decisions that will help control unemployment and inflation.

In a slow economy: If spending decreases then companies become less profitable and may choose to layoff workers, which will further decrease spending and profitability. The Fed will try to reverse the cycle by lowering rates. When the Fed rate changes, other rates follow. This may encourage spending as it makes it cheaper to borrow for education, cars, homes, etc.

In a healthy economy: When the economy is thriving and the job market is good there is a lot of pressure on companies to raise wages. Confident consumers will spend more even if prices rise a little. When prices increase beyond a “healthy rate” of around two percent, the Fed gets worried. It may raise rates to decrease borrowing and spending.

Rates will Rise
Rates have been low since 2008 when the Fed brought short-term rates down near zero percent. Those who were able to borrow benefited from low interest rates. Right now the Fed is not worried about price inflation, but it does want to get rates back up to “normal.”

bag of money

Your Spending
The result will be higher rates when you take out a mortgage or get a loan for a new car. Anything with a variable rate, like some credit cards, will probably see an increase. Debt is going to get more expensive. Paying debt off and living within your means will be important.

Your Income
The labor market is improving. Many companies have announced plans to raise wages for workers, but the expected improvement has not yet hit. It’s coming!

briefcase

Wage growth was just around 2 percent in the last year and the Fed believes the country is headed towards 3.5 percent. This is good news for workers and it gives the Fed confidence to slowly raise rates to normal. However, if wage growth is too high the Fed will become uncomfortable and will really drop the hammer down—acting quickly, with force just to make sure prices don’t get out of control.

Your Investments
Back in 2013, Ben Bernanke, then Chairman of the Fed, suggested the Fed might end (taper) its stimulus. The stock and bond markets went crazy! The event even has a name: “The Taper Tantrum!” In the end, the Fed continued its stimulus.

The Fed is unlikely to catch investors by surprise when it finally does raise rates. Its members have been quite open about its plans and the economy is able to withstand a very gradual rise in rates.

percentage

Investors should expect more volatility, but in spite of the choppiness, the returns should still be positive. That’s what we have seen in the past.

Prepare Your Personal Economy
Make sure you are saving some income for rainy days even if it means cutting back on a little spending. Make sure the risk you are taking in your investments matches your ability and willingness to handle it. Finally, align your portfolios for the future.

Will the Fed hike rates in September? Will it be just 0.25 percent? How long will the Fed wait to make its next move and will it go too far too fast? The answers will be “data dependent,” a phrase the Fed members have been using lately. It will depend on U.S. economic growth, wage growth, and price inflation.

A gradual economic improvement will allow time to digest the news and act slowly—waiting months between each rate increase to see the impact. There are no signs of overheating for now. If that changes, the Fed is not going to sit idle. It would have to act. After all, to a hammer, everything looks like a nail.

 

*Research by SFS. Data from public sources. This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

Tags: , , , , ,

Escape Velocity: What Will Fuel Our Economic Breakout?

By | 2014, Money Moxie, Viewpoint | No Comments

Escape Velocity is simply the speed required to escape gravity’s pull. An object on earth’s surface would need an initial speed of 6.96 miles per second (Mach 34) to get out of the gravitational range of the planet.

As we continue to recover from the 2008 recession the question looms; “What will it take to escape the unseen gravitational pull of what is called the new normal economy?”

Slow economic growth has given Americans a feeling that the economy is destined to grow at 1 to 2 percent. The decades-long average prior to the 2008 recession was 3 to 4 percent.

Liftoff

Let us be clear. This article focuses on the economy, not the stock market. The market as measured by the S&P 500 formed a bottom 5 years ago. That index has reached around 50 all-time highs in the last 12 months. From January 1, 2009 to January 1, 2014 the S&P 500 went up over 100 percent.

Should it bother investors that the market has been making new highs? No, making new highs is normal for American stocks. Should we worry that five years is too long for a bull market? No, it is a healthy sign to have long periods of growth interrupted by smaller drops.

The question is “How long can the bull market in stocks last if the new normal continues?” Furthermore, what kind of rocket fuel will propel this economy beyond its current trajectory?

As the Federal Reserve stimulus winds down, something else will have to take its place. The U.S. economy needs to transition from a government-induced to a consumer-driven expansion.

Can consumers afford to spend any more? It has taken a long time, but unemployment levels are getting closer to pre-recession levels (currently 6.7 percent). Household debt payments are at an all time low as a percent of income, which is also really good. Unfortunately, the average income of American households is one economic measure showing no improvement over the last 5 years.

Household income may be the most important ingredient to current growth. It may improve soon. As unemployment numbers get stronger, the labor market will tighten. Employers will raise pay for their workers. When that begins to happen in the U.S. workforce, consumers will finally have more spending power to propel the economy.

While stock returns have been great in recent years, they cannot rise forever without better economic growth. The gravitational pull of the new normal is just too strong. Keep an eye on improving income in the United States. It may fuel the next breakout.

As the Sochi Olympics ended, many eyes turned to the other side of the Black Sea and the threat of war in Ukraine. With each successive turn of good or bad events, our U.S. stock markets1 seem to react in like manner. That begs the question, what impact do wars have on stock markets, and how should an individual react?

To see the impact of war, let’s first examine the most recent war that started on American soil. The impression that many people have is that the recession of the early 2000s started with the terror attacks on September 11, 2001. The reality is that stocks were already on a downward trend when September 11th happened. Yes stocks dropped sharply in the 10 days following that awful event, but once America grasped the reality of the situation, stocks rebounded, recovering the losses directly related to the shock of that event.2

There is a similar pattern for each conflict involving the United States. “In 14 shocks dating (back) to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. The shocks, which also include the September 11th terror attacks and the 1962 Cuban missile crisis, lasted eight days, with total losses of 7.4%…The market recouped its losses 14 days later.”3

Similar patterns of decline occurred during several Middle Eastern conflicts such as Desert Storm in 1991, the Iraq War in 2003, and the Syrian Conflict in 2011. Leading up to each of these events, the market dropped, but recovery happened shortly thereafter.4
Mark Luschini, the Chief Investment Strategist for Janney Montgomery, put it this way, “It’s not that it’s welcome, but once it gets underway, you can quantify what the situation might look like. When you’re left in the dark about when it will start, what will be the result, it gives investors trepidation.”5

Short-term shocks to the system cause short-term consequences for the stock market and the economy. On the other hand, major periods of conflict can have more lasting effects on the economy and the stock market.

One of the most harmful economic effects of war is a supply shock. A major shock in the supply of goods or labor can severely impact economic productivity. Sources of these setbacks include economic sanctions, manufacturing destruction, infrastructure damage, etc. This has not been a factor of major concern within the United States as it has been a long time since there has been a war fought on American soil.

Public opinion supports the belief that war and its associated spending creates positive economic outcomes for the U.S. economy. This is mostly due to the higher GDP growth that was exhibited during conflict periods like World War II, the Korean War, the Vietnam War, and the Cold War. The only outliers have been the Iraq and the Afghanistan wars.6

8 Million

While war tends to generate some positive economic benefits, it is more of a mixed bag for stock markets. “During WWII stock markets did initially fall but recovered before its end, during the Korean War there were no major corrections while during the Vietnam War and afterwards stock markets remained flat from the end of 1964 until 1982.”7

Another typical impact of major conflicts is inflation. This is due to the increase in government spending through various financing methods. “While inflation may be good for reducing debt burdens, high inflation has many harmful effects, such as wealth redistribution and erosion of international competitiveness.”8

Short-term conflicts typically have a short-lived impact on the stock market. As such they shouldn’t change an individual’s investment philosophy or cause one to “abandon ship.”

A more prolonged conflict may cause an individual to take a more judicious approach by reevaluating his or her goals and making adjustments based on the current market environment. As always, it is prudent to seek advice from an experienced investment professional that can help you plan for and navigate your own voyage through our uncertain world.

*Research by SFS. Data is from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

Tags: , , , , , ,