On the final installment of Jerry Tuma’s Smart Money Radio for 2018, Jerry and co-host John Criswell assessed where we are in the markets and the economy at year end. Here’s a review of the show, the markets at year end and a review the three unstoppable forces that Jerry says are important to remember when making investment decisions for 2019 and beyond.
Coal in the Market’s Stocking for Christmas
This edition of the radio show was produced before the holiday week and unusual events on the weekend leading up to Christmas. Jerry said during the show that the signs that the market has entered bear market territory are now in place. Europe, China and the emerging markets are in bear territory already.
The Federal Reserve announced its last rate hike for the year on Friday, 12/21/18 and indicated that it intends to stick with future hikes in the new year. On Sunday, 12/23/18, Treasury Secretary Steve Mnuchin took the unusual step of issuing a statement that he had checked the health of America’s banking system and found it to be strong and that liquidity was “ample”. President Trump tweeted on Monday that the only problem that the U.S. economy has currently is a Federal Reserve that doesn’t grasp the damage that its rate hikes are doing to the markets and to the otherwise healthy U.S. economy.
All of these signals over the span of Friday through Monday sent the markets into a swoon on Christmas Eve, with the Dow falling 2.9 percent and the S & P closing down 2.7 percent. The Fed rate hike, even though expected, still seemed to unnerve investors. Mnuchin’s remarks, meant to soothe the market, may actually have had the opposite effect, being received as a nervous “nothing to see here folks” skittishness. And a festering political conflict between the President and Fed Chair Jerome Powell makes investors nervous. Investors hate uncertainty and “voted with their feet” to head for the exits.
Later in the week, after Christmas, the markets rebounded as some investors stepped in to purchase stocks at lower prices.
Three Irresistible Forces at Work
Current market gyrations, though certainly important, are bumps along the road toward the ultimate outcome of three unstoppable forces for which investors need to prepare.
The first is the aging of the Baby Boom generation and the effect it is having on the U.S. government’s finances. As more and more Baby Boomers age into drawing from Social Security and Medicare, the strain on the already underfunded system will reach the breaking point.
The second is the never ending growth of government “entitlement” programs. Once any government benefit program starts, it never dies or gets cut back. It only grows. With the total U.S. debt now standing at over $21 trillion and with the Millennial Generation embracing socialism, there is no end in sight for growth of U.S. government benefit programs.
Finally, the compounding of the U.S. debt will cause the percentage of the debt payment in the annual government budget to grow to unsustainable levels. In 2010 the federal government spent $196 billion paying interest on the U.S. debt, which was 5.7 percent of that year’s budget. By 2018 the government spent $384 billion, or 8.8 percent of the budget. Remember, this was during a period of record low interest rates.
But by 2028, with rates rising, the projection is that interest alone on the national debt will hit $900 billion. Almost one trillion dollars per year will be in interest on the U.S. government’s debt obligations. This is unsustainable.
Former U.S. Federal Reserve Chairman Alan Greenspan, now 92 years old, has gone on a crusade. Rather than retire to a quiet life, the former “maestro” of the U.S. banking system is warning that the U.S. faces the return of 1970s style stagflation during the 2020s.
What to do in the current situation?
The U.S. markets appear to have entered bear territory. Europe, China and the emerging markets already are there. What should investors do for now?
Though Jerry cannot make specific, blanket recommendations, the philosophy at Cornerstone Financial Services is to not ride out bear markets. Opportunity exists in moving most of an investor’s money into cash to wait out the bear, then buying back in at low prices when the bear seems to have run its course.
Other opportunities could be to buy into high quality bonds or buy into “inverse funds,” funds that go in the opposite direction of a bear market requiring a high degree of investment sophistication.
Again, each individual’s investment decision must be handled on an individual basis and Jerry makes no blanket recommendations.
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Be sure to listen to past editions of Jerry Tuma’s Smart Money Radio.