What I Care About This Week | 2023 May 15

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Photo by Andre Estevez on Pexels.com

by Franklin J. Parker, CFA

The Summary

  • Earnings season is coming to a close, with almost all companies having reported earnings. The news isn’t great, but it isn’t terrible either. We started the quarter expecting a 6% decline in earnings, and it appears that we will close the quarter with a 3% decline in earnings — better than expected, but still a contraction. Inflation is a common theme in earnings calls, with companies starting to have difficulty raising price to offset increased costs. Additionally, earnings outlooks for the rest of the year have softened considerably, with many companies indicating ongoing trouble through 2023.

  • Inflation and the Fed are still top-of-mind for investors, but the big story right now is the debt ceiling debate. Treasury has indicated that timing exactly when they will run out of cash is tricky, but late June is starting to look like a danger zone. With negotiations moving slowly, investors are getting worried. As I have talked about here before, a default on US treasury bonds would be catastrophic to the financial system and broader economy. Everything would be affected, from mortgage rates, credit cards, bonds, stocks, the value of the dollar (and thus inflation), and so on. Who Treasury pays in a shortage of cash scenario is an open question, and one investors are not eager to see answered.

  • This week is a light data week, though we do get a read on manufacturing and retail sales. Overall, the signs are pretty clear that the US economy is stumbling. That said, employment remains very strong, though it is typically the last domino to fall. Given the risks in the marketplace (earnings contractions, the debt ceiling debate, manufacturing contraction, etc), I am holding my view that there is more downside risk in this market than upside. Caution is warranted, although your goals and time horizon will dictate which risks you can afford to take.

The Details

How much do you need to accomplish your goal?

I’ve seen several news articles in my various social media feeds about how much you need to retire. The figures vary wildly from $500,000 to over $5,000,000, with everything in between. Why such a disparity in figures? And how much do you really need to accomplish a goal?

There are some financial planning rules of thumb that we can use for goals require ongoing cashflows, like retirement.

The first rule of thumb is that for every $1000 per month you need in income, you need $300,000 invested. This carries several important assumptions which is why it is only a rule-of-thumb. Even so, it is helpful for some back-of-the-envelope planning. If, for example, you figure that you need $9,000 per month of income from your investments, then you can ballpark that you need about 9 x $300,000 = $2,700,000 to sustain that income forever.

Again, this is just a rule of thumb, but it gives you somewhat of a starting point. Digging deeper is important to understand more specific figures, and the financial planning process is critical for that.

In the end, the planning process helps to not only develop a plan, but also to solidify your own goals. Not to mention, it informs the risks you can and cannot take with your investment portfolio.

Chart of the Week

The cost to insure US Treasury bonds against default has spiked to the highest level in at least 20 years, surpassing the previous debt-ceiling standoffs. While the market-implied probability of a default is still very low (in the neighborhood of 0.22%), the concern has gotten very acute for investors eager to see progress.

In the event of a default, I would expect a suspension of interest payments and maturities (investors won’t get any more cash). Once Congress authorizes additional borrowing, I would expect to see investors made whole (investors would then get their interest and maturity payments). In the meantime, there would be lots of volatility and scrambling to find a safe haven (which would normally be treasuries). In the end, however, investors would most likely get the money they are owed.

Of course, it is the aftermath that is most concerning. The “full faith and credit” of the US would, from here on out, be highly suspect.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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