Soft Landing Optimism May Be Premature - And Bonus Portfolio Update
It is better to be cautious and humble. My portfolio moves in July reflect that.
Happy Monday, everyone!
Today’s post is going to be a bit of a mixed bag, but in terms of a theme I think you will see clear connections all the way through.
Following the Fed’s decision last week to hike rates by .25%, to a range of 5.25 to 5.5 percent, Jerome Powell held a question-and-answer session with the financial press, as has been his custom. One of the reporters at this session was Jeanna Smialek of The New York Times.
The next day, July 27, Ms. Smialek penned a cautionary article. As with several commentators I have read, Ms. Smialek was careful to note that Powell appeared deliberately vague, not committing the Fed to anything in particular one way or the other but rather keeping its options open.
However, she went on to note that caution was warranted with respect to the apparently widely-expected soft landing. In 1989, 2000, and again in 2007, she points out, financial commentators made fairly strong statements with respect to the likelihood of an economic soft landing (a term inspired by the soft way the lunar module landed on the moon back in 1969) in each of these 3 cases. In all 3 cases, recession quickly followed.
The news is not all bad. Growth continues to look resilient, and it is not impossible that a soft landing may be achieved.
At the same time, there are many unknowns. In 2008, for example, higher interest rates eventually burst a housing bubble, which in turn set off a chain reaction of financial explosions that roiled global financial markets. Does anything about today’s housing market feel like we could be set up for a repeat?
Summing it up nicely was this quote.
“We don’t know what the next shoe to drop is. It looks like we’re headed to a soft landing, but we don’t know the unknowns.”
Subadra Rajappa, Head of U.S. Rates Strategy - Société Générale
I’ll close this section with a couple of quick graphics. I actually came across this first one a couple of weeks back. This screen capture is the latest update as of this writing.
Take a close look at the recessions in 2000 and 2008, mentioned above. In both cases, I could not help but note that the S&P 500 index started to decline right about the time interest rates peaked, and continued to do so for a period even after rates began to fall.
Will we see a repeat this time? No one knows for sure but, particularly for retired investors like myself, it may pay dividends to be cautious.
This second graphic is from Vanguard. It actually comes from a June, 2023 report, so is about a month old at this point. But the Fed action of this past week is right in line with what Vanguard forecast. Now, we just wait to see if the rest of their expectations play out.
Put those two graphics together, and you have a little something to ponder for the day.
Quick Portfolio Update
In my Q2 2023 personal portfolio and asset location update, I revealed that I had increased my cash allocation to just a hair shy of 36%.
During July, I made a couple of moves that brought my cash allocation up to roughly 40%. Basically, I decreased my allocation to U.S. stocks and REITS by roughly 2% each, for a total of 4%.
This relates to the below graphic, from Financial Times based on Bloomberg data.
As shown in the graphic, we are currently at the point where yields across US equities, cash, and bonds are virtually the same.
I still happen to personally believe that we are in for, at the very least, a 5% correction before the end of 2023, and that a 10% pullback is not out of the question. It is my hope to put that last 4% back into the market at various price levels between those two points. In the meantime, the return on cash will assure that I don’t visit the poorhouse anytime soon.
Have a great week, everyone! Oh yeah, and . . .