It’s Episode 133 and Fed Chair Jay Powell has spoken. He says inflation is still too high and they’re prepared to raise interest rates further. Is this economy ready to fall off a cliff? Are they going to keep raising interest rates and tightening financial conditions? Well, we’re going to give you our two cents.
On The Tipping Point, we’re going to talk about concentrated stock risk, the perils of owning individual stocks, and why it may derail your entire financial life. Our colleague and certified financial planner, Aaron Dessen joins us.
Powell has spoken – but what did he say?
The Fed said they’re prepared to raise rates. However, the Fed doesn’t know what they’re going to do a month from now because they’re data dependent.
- Between now and then we have another CPI number and employment number
- The bond market seems to be signaling the Fed is done raising rates for now and might cut next year
- Mortgage rates up to 7.25%
- We’ve had four regional bank failures
”..they did break something so they're going to be very careful here. And I think the Federal Reserve is probably cognizant of that.Bob Payne
”Well, he's saying we might raise rates. We might not raise rates, but the market just doesn't care.Chris Payne
”You're on this path to that soft landing. Don't screw it up.Ryan Payne
Second quarter profits came in much better than expected
Companies are raising their guidance for the future, indicating better earnings growth. Markets are optimistic about the future, with productivity increasing and earnings growth expected to reach double digits. Although there is some selling, overall, the outlook remains positive.
Just a correction? Or start of something bigger?
August is traditionally a bad month for the stock market, with an average 10% correction. The S&P 500 has experienced a 5% correction. There are two camps: a correction in an ongoing bull market or naysayers predicting a recession.
”The market is always right.Bob Payne
You’re seeing growth all over the world
Even with war in Eastern Europe and high oil prices, Europe has had positive growth in the second quarter. In fact, we seeing surprises in the positive all over the world.
”Japan's economy is on track to grow 6% this year. They're just crushing it.Ryan Payne
As an investor, you want to ignore the noise and look forward
The best lesson you can learn as an investor is to remember that, when we look back at every dip in history, it’s always an opportunity. But for some reason, the next dip is seen as a risk.
”My favorite chart is a history of the market. You go back to 1926.. to 1940.. to 1953 when I was born.. and they're moving up on a perpendicular line from left to right.Bob Payne
The Tipping Point
Concentrated Stock Risk
We’re big believers in diversification. Diversify your risk. And we’ve never really been a big fan of owning individual stocks. This past week has been a great example. Footlocker was down 68% over five days, Dick’s Sporting Goods down 26% in five days, Macy’s down 15% in five days, and Peloton down a whopping 78%.
It could be the latest tech darling or your employer’s company stock
People tend to get emotionally attached to an investment. They only focus on the upside and fail to see the potential risks.
”..we run so many retirement projections and really everybody can meet their goals with a very conservative return projection. But they're loading up on these tech stocks.Aaron Dessen
”A great example of that was back in the early 2000s where people had Enron stock in their 401k and pension.. when it went belly up, people lost everything.Chris Payne
Some people aren’t even aware they’re exposed to so much risk
You may be told something is “guaranteed” like a corporate bond or annuity. But that “guaranty” is contractual with the company. What if the company goes out of business?
”There are no guaranteed investments, other than government bonds. They're backed by the full faith and credit of the U.S. government.Bob Payne
One of the biggest risks today is tech
Some see tech stocks as a safe haven or defensive, but if you look at Nvidia up 220% this year from peak to trough last year was down over 65%. Another example is Microsoft. If you look back at the dot com bubble, it took Microsoft 13 years with the stock doing nothing even though the company was increasing its revenue. There’s a disconnect because the valuations just get so high.
”Anything that can go down over 60% in a 12 month period that's not defensive.. that's called an awful buzzkillRyan Payne
”If you make money an individual stock, you're more lucky than you are smart. That's just the way it is.Bob Payne
Hidden Facts of Finance
Huy Fong Foods maker of the popular Sriracha sauce cut production after a couple of bad harvests of red jalapenos. The price of its 28-ounce bottle, usually less than $10, surged to $70 or more a bottle.
Changes in reserve status all take a long time. In the 19th century, the British economy was the world’s largest, with the pound being the world’s major currency. The US economy size surpassed Britain’s in 1916 but it wasn’t until after World War Two that the dollar became the world’s major currency.
Which country exports the most cars? Germany, Japan or China? The number two economy surpassed Japan in the first half of 2023. Full year exports should exceed 4 million vehicles, up from 1 million or so pre-pandemic, according to UBS.