by Franklin J. Parker, CFA
The Summary
- In the face of a crisis among banks, the Fed raised rates by 0.25% and indicated this could be the last hike for a while (read as: in this economic cycle). Investors have now priced-in rate cuts to begin later in the summer. Of course, the Fed cutting rates would be in response to recessionary signals, so that would not be positive for stocks, at least based on today’s data.
- While the immediacy of the crisis in banking has subsided, more policymakers are sounding the alarm that this is likely to cause a credit crunch which could lead to a recession (we discussed that here last week). Banks in crisis aren’t expanding credit, so individuals and businesses will need to curtail their spending. In that vein, March 9 – 17 was the first week since 2013 that no investment-grade corporate bonds were issued. The drying up of credit is a strong recessionary signal.
- This week we get some more data on the economy, from manufacturing to services to consumer spending. My view is that a recession is becoming more imminent, though the macroeconomic signals have not flashed red just yet. While the economy could still land softly, I see that outcome as less likely. In any event, investors with short time horizons would do well to lighten their risk exposure and batten down the hatches. Downside risk looms much larger than upside risk in this environment.
The Details
How much do you need to retire?
Of course, before we can even attempt to answer this question we have to understand what you would like retirement to look like. This is a harder question to answer, but it is a critical part of the process! Only once we understand what you’d like to be doing can we assign a monthly income requirement to it.
In truth, this can be the hardest part of the process, and it very often requires some dreaming. I like to start with some imaginary questions: it is Tuesday morning and you are having your coffee. What do you see our of your window? What are you doing today? What are you looking forward to later in the week?
These kinds of questions can at least get the wheels turning! Even so, I have found that it is rare for people to have a perfectly clear picture of what retirement looks like, and that is okay.
It can also be helpful to think of your retirement in layers. The foundational layer are your basic necessities: your food budget, where you live, your utilities, etc. From there, we can build spending that is more flexible: “fun” money, things you’d like to do, trips, family vacations, etc.
This layering also helps us plan for the inherent uncertainties that come with planning across decades. Adverse events (like a medical issue) cannot always be planned for, but the layering of expenses gives you flexibility for dealing with these moments.
Retirement planning is not a cut-and-dry activity. It takes some dreaming, some scheming, and some on-the-fly free-wheeling!
Chart of the Week
Bubbles are an interesting phenomenon in financial markets. Pretty much everyone agrees they happen and yet no one can agree on a definition of them. Indeed, very often, whether someone believes something is a bubble or not depends on whether they invested in it or not (if you are invested then it is not a bubble, if you are not invested then it is a bubble).
This week’s chart looks at some bubbles over the years, starting with gold in the early 1980s and ending with FANG+ stocks and bitcoin (which haven’t popped just yet). Of course, whether FANG+ and bitcoin are indeed bubbles remains to be seen, and whether you agree that these are indeed bubbles may have a lot to do with whether you are invested in them or not. Even so, it is difficult to deny the massive price run-up in these assets over the past years. I do wonder how they will behave through the next recession.
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