In today’s post we discuss how China’s economy impacts your household.

Spoiler alert: it may not be as bad as the media portray.

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China’s Economy & Impact on Your Household

China is the world’s second largest economy after the United States.

Recently, the media have been painting China’s economy as if it’s circling the drain.

Truth: In reality, we have limited access to China’s economic data due to its communist system and reporting methods. Consequently, many countries gather fragmented information to gain a more comprehensive understanding rather than relying solely on official Chinese figures.

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Why all the media hoopla?

China’s exports dropped 8.8% in August year-over-year and imports dropped 7.3% (Source Reuters®).

Given China’s size, when their economy slows down, there’s a ripple effect around the world.

Still, China’s slowing economy isn’t as striking as the media portray it.

In general, China’s economic slowdown impacts U.S. households in several ways: it increases supply chain pressure, making it more difficult to acquire certain products such as clothing, electronics and furniture; and it leads to higher prices due to supply shortages.

Nevertheless, there are facts missing from the media’s narrative.

The media often downplay the upside.

Specifically, 75% of the U.S. GDP is produced in the states. We’re extremely fortunate to produce the majority of our goods and services.

In simple terms, the U.S. Gross Domestic Product (GDP) measures the total value of goods and services produced within the U.S. during a specific period, typically a year or a quarter. It serves as a reflection of the size and health of the U.S. economy.

Another upside includes increased reshoring; specifically, bringing manufacturing back to the U.S.

According to RBC Capital Markets, “83% of manufacturers surveyed in the 2021 State of North America Manufacturing report noted that they are likely to reshore their production lines. As more and more companies begin to bring their industries home, new factory hubs, manufacturing zones and subsequent residential construction sites are likely to be in high demand.”

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The World’s Largest Economy

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Deep Data Dive: U.S. Imports & Exports

For an in-depth look at U.S. import and export activity, check out these two resources:

Bureau of Industry and Security reports: In 2022, 7.5% of total U.S. exports of $2.1 trillion to the world were exported to China, and 16.5% of total U.S. imports of $3.2 trillion were imported from China.

The Observatory of Economic Complexity (OEC) explains how countries make money. View the latest U.S. trends.

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Your Investment Portfolio

The media often leaves us feeling like there’s a cloud over us.

Gone are the days of Walter Cronkite, aka the most trusted man in America, who was well known for his calm and unbiased news reporting.

While we’re not broadcasting journalists, we are your financial anchor, here to provide you clear facts and perspectives for when you need to make critical financial decisions.

Importantly, we’ve constructed your portfolio to help withstand economic uncertainty; specifically, via a diversified asset management approach consisting of different asset classes, becoming more conservative as you move through pre- and post-retirement phases. In general, if one asset class performs poorly due to economic uncertainty, other asset classes may perform better, helping to offset potential losses.  

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News vs. Money & Psychology

When you’re listening to financial news, keep this in mind:

According to financial behavioral analysts, the emotional impact of a 5% loss in your portfolio is twice as powerful as the joy we feel from a 5% gain. It’s like the difference between losing $100 and finding $100 unexpectedly. The loss stings more than the gain brings pleasure, even though the amount is the same. In the world of finance, this behavior is called loss aversion bias.

Many media outlets are counting on this financial phenomena to increase ratings. Said differently, financial uncertainty creates clicks, likes, shares, views, etc.

What’s rarely reported by the media is the following hard fact:

When your portfolio declines, it’s a temporary decrease in value—not a loss.

“And that’s the way it is.” – Walter Cronkite

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Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.

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In today’s post, we:

• Recap the past few months.
• Consider what may lie ahead.
• Explain why prices continue to be high at grocery stores.
• List more affordable grocery stores than Market Basket.

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It appears market volatility is on summer vacation.

The last six months have gone unexpectedly well. The S&P is up 17% since January 1, 2023.

This positive performance has surprised many, including 44 out of 46 surveyed financial analysts who earlier this year predicted the markets would continue to decline. Thankfully, they were mistaken.

Remarkably, almost all of this increase is attributed to seven companies, aka the Magnificent 7, including: Apple, Microsoft, Amazon, Nvidia (computer component manufacturer), Tesla, Alphabet (Google) and Meta (Facebook/Instagram/Threads).

What’s more, a great deal of the increase is due to expectations around ChatGPT, an artificial intelligence chatbot. The AI program launched in November 2022 and attracted 100 million users within two months, the fastest-growing user base until the recent launch of Threads, a new social network owned by Meta. (Threads surpassed 100 million users in less than a week.)

If you try ChatGPT, remember not to share any personal or proprietary information. Also, be aware of these six risks for businesses (many apply to individuals as well).

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Looking Ahead

We’re closely monitoring whether or not the Fed will raise interest rates again.

(Update: The Fed hiked interest rates by a quarter point on 7/26/23)

Fed hikes often lead to reduced consumer spending, resulting in lower corporate earnings and falling stock prices.

Since March 2022, the Fed has raised rates 10 times to help slow inflation. The current Fed Funds Rate is about 5.25%. A year ago, it was only 1.75%.

Mortgage seekers in particular are experiencing the negative impact of rising rates.

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Inflation Cools

Inflation is down around 3% versus 6.4% this past January. Besides the rate hikes, lower energy prices and fewer supply chain interruptions are key factors reducing inflation.

While there may be other hikes later this year, we believe the rate-hike cycle will end soon given key economic indicators, including strong consumer spending and employment trends. Also, consumers are stockpiling cash, about $6 trillion!

(Remember, if you’re holding a lot of cash, reach out. There are several good options to put your cash to work, while also maintaining liquidity.)

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Grocery Stores & Inflated Pricing

We found an interesting article explaining why prices continue to be high at grocery stores.

According to the article, production costs for food manufactures have gone up mostly due to increased transportation, packaging and wage increases.

However, ingredient prices have been declining for months, while grocery bills are still up.

What gives? Basically, food manufactures are focused on profits, e.g., one food manufacturer’s net income was up 39% year over year.

Overall, we need to be creative and selective while food shopping. This article has some good ideas for saving on your next grocery bill, including encouraging us to shop at different locations.

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Food Pricing Lower Than Market Basket

To test the shop-elsewhere idea, we came across this price survey reporting the following:

ALDI’s prices were 41% lower than the all-store Market Basket average. Also, although its prices were higher than ALDI’s, Trader Joe’s still offered savings compared to most grocery stores in the area. Its prices were about 31% lower than Whole Foods, 30% lower than Wegmans, 28% lower than Star Market, 26% lower than Shaw’s, 22% lower than Stop & Shop, 15% lower than Target, 5% lower than Market Basket and 4% lower than Walmart.

Keep in mind, ALDI and Trader Joe’s offer mainly their own brands. Still, if it’s healthy and tastes good, why not save?

Have you discovered any successful grocery-saving strategies? If so, we’d love to hear about it.

Comments or Questions

Your comments and questions are always encouraged. Please reach out anytime.

–David Bunker, Financial Advisor & Fiduciary

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Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.

How long do you think you’ll live? We share the most common answer from our clients below.

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Today, we discuss three retirement planning dynamics, including life expectancy, Social Security timing and spending changes during retirement. All three play a critical role in your retirement’s financial stability.

Also, let’s acknowledge that some retirement planning decisions are not easy to make. Therefore, please contact us anytime. It’s why we’re here, to help you maximize your retirement savings and make well-informed financial decisions.

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Background Resource

There’s an annual report financial advisors often reference called Guide to Retirement by J.P. Morgan Asset Management. It’s a comprehensive collection of retirement planning trends and includes several interesting charts.

For our discussion, we highlight three charts, since the subjects have an outsized impact on your retirement’s financial stability.

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Life Expectancy Probabilities (Chart 4)

Whatever you think your life expectancy will be—assume it’s longer for financial planning purposes!

In the last hundred years, life expectancy has doubled primarily due to advances in health care, economic development and lifestyle changes. In fact, individuals from younger generations like Gen Zers (born between the mid 1990s and early 2010s), will routinely live to age 100 or older.

For individuals and families with investable assets ranging from 1 to 3 million, you have roughly a 20% chance of living to age 92. For married couples, there’s a 50% chance one of you will live to 92.

In our planning meetings, it’s common for clients to estimate their life expectancy. The most popular guess is age 82. However, it’s important to acknowledge that these estimates are exactly that—estimates.

Life expectancy is a key factor in retirement planning, i.e., it drives savings withdrawal rates. Also, since no one knows their expiration date, it’s important to not underestimate.

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Related: The Living to 100 Life Expectancy Calculator uses current medical and researched scientific data to estimate your life expectancy. Give it a try.

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Social Security Timing Trade-Offs (Chart 12)

If you’re thinking of retiring before full retirement age, avoid taking Social Security early if possible.

Why? Because, for every year you wait to take Social Security after age 62, you earn a guaranteed 8% more in Social Security income each year. Instead, it’s typically better to draw down your investment portfolio than to lose the guaranteed 8% each year, since there’s no market-return guarantees.

Remember, claiming early is a permanent reduction in your monthly benefit amount compared to waiting until full retirement age or even delaying benefits beyond that age.

There are many reasons to take Social Security early, including poor health, caring for a family member and others. Every situation is unique, however, it’s important to consider multiple Social Security claiming scenarios before making a final decision.

For Example:

Let’s say you’re married and your household needs additional income entering retirement.

For long-term retirement income optimization, one scenario is for the lower earner to claim Social Security at full retirement age. For this example, we’re using age 67 at $2200 per month. However, the higher earner postpones claiming beyond full retirement (age 67 at $3000 per month), waiting roughly four years to claim at an 8% annual increase, resulting in almost $4000 per month.

Keep this in mind, if you claim Social Security at age 62 and live into your 80s, you’ll miss out on hundreds of thousands of dollars.

Before claiming Social Security, call us so we can help you understand the full impact on your portfolio.

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Resource: Social Security Full Retirement Age Calculator

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Changes in Spending (Chart 30)

There’s a term used to explain retirement spending phases called the Retirement Spending Smile.

In general, retirement spending typically takes the shape of a smile. Specifically, spending is higher in the initial years, dips during the middle years and then increases again in the later years.

Simple Example:

Referencing the chart below, spending extra on travel early in retirement is common. But, as you age it drops off, while health care spending grows.

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Understand Your Retirement Spending Limits

One of our jobs is to tell you what you can afford to spend during retirement.

If you want a closer look at how your estimated budget impacts your portfolio, let us know. We’re happy to model different budget scenarios and their impact on your retirement income withdrawal rate.

Rule-of-thumb: It’s likely you can spend more during your initial retirement years, as long as you’re budgeting to spend less during your mid-retirement years.

Costly Spending Trend

In general, one costly financial event during retirement doesn’t usually hurt you, e.g., a new car. Instead, it’s the constant overspending year after year that jeopardizes your portfolio.

Managing Portfolios vs. Uncertainty

Clients often ask, “How do you design my portfolio to account for all the uncertainty, e.g., market volatility, so it has the highest probability of success when I need to start withdrawing money for retirement?”

There are multiple steps to managing your portfolio for success, however, one key approach is setting aside enough liquid assets, so you don’t have to sell when the market is down. This set-aside gives you a margin of safety. For example, if you need to draw $100,000 a year from your portfolio, we set aside roughly $200,000 in cash-equivalent assets. The set-aside is still earning interest, but also highly liquid.

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In Closing

Life expectancy, Social Security timing and retirement spending all culminate to strengthen or diminish your retirement income plan, and just one short-term change in your strategy can easily enhance your financial stability.

Comments or Questions

Your comments and questions are always encouraged. Please reach out anytime.

–David Bunker, Financial Advisor & Fiduciary

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Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.

It’s been a while, but we can confidently say:

Last quarter was—good.

The S&P was up 7.5%.

Overall, we anticipate continued market volatility. Still, the uptick feels nice!

(Go ahead, savor it for a moment. You’ve earned it after last year’s turbulence. Also, nice job staying the course.)

Candidly, last quarter’s improvement was a little surprising, given the worry flooding the news, i.e., looming recession.

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There are two key factors driving the welcomed increase, including:

#1—Companies, institutions and individuals flushed with cash slowly reinvested it.

#2—Tech stocks are up 17% since the beginning of the year, rebounding from last year’s 30% low.

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Looking Ahead

Driven by recession fears, it’s likely we’ll see the market pull back some during the second quarter. As of now, we’re not in a recession. However, there’s relentless recession-forecasting news which can cause consumers to reduce their spending.

Keep in mind, consumer spending makes up two-thirds of the economy.

If consumers slow their spending, the economy then slows—kindling a recession.

As we’ve said before, most families won’t feel a recession’s impact unless a family member is laid off.

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Recessions & Psychology

Recessions can be caused by psychological mindsets; specifically, how individuals and businesses perceive their future economic situations.

Case-in-point: The recent Silicon Valley Bank failure, debt ceiling showdown, cryptocurrency meltdowns and tech layoffs are creating emotional havoc.

Yet, some concerns are unwarranted.

For Example:

Sure, there are tech layoffs, but most of these companies overhired during the pandemic.

Said differently, they still have more employees now, than before the pandemic.

False perceptions often arise when consumers are not presented with both sides of the story.

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Your Portfolio: What we’re doing right now.

Beyond ongoing rebalancing and risk management activities, there are two key investment initiatives we’re currently focused on, including:

#1—Increasing Bond Durations

During 2022, we shortened bond durations to help protect your portfolio from increasing interest rates. However, now that rate increases are slowing, it makes sense to (slowly) extend bond durations.

Remember, bond prices are inversely related to interest rates, i.e., when interest rates decrease, bond prices generally increase.

In other words, by extending the duration of bonds, we can potentially benefit from the increase in bond prices that may occur due to the expected trend of decreasing interest rates.

#2—Evaluating International Stock Investments

During the last 10 years, the United States has outperformed international markets and, therefore, we’ve maintained low international exposure. We also reduced our international holdings by one-third, following the Russian invasion of Ukraine.

However, today many international stocks have become very cheap compared to U.S. markets.

The key question is:

Are there deals to be had?

To answer this, we’re currently evaluating if these stocks are cheap because they deserve to be cheap, i.e., they stink, or did the markets overshoot. Specifically, markets tend to overshoot when stock prices are falling, moving lower than warranted.

We continue to evaluate the situation and may dip our toes back in during the second quarter.

Keep in mind, we currently have international exposure via the S&P 500; specifically, 40% of its revenues are international.

For example, Coca-Cola, Microsoft, Apple, etc. are U.S. based companies, but all do business globally.

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Federal Debt Ceiling Showdown

We’re faced again with another government debt-ceiling argument, given that the U.S. Treasury starts running out of money this summer.

The debt ceiling is a legal limit on the amount of debt the U.S. government can accumulate, and if Congress fails to raise it, it could lead to a government shutdown, default on debt payments and a potential downgrade of U.S. credit ratings.

Candidly, the likelihood of this happening is low, given the historical precedent of Congress eventually coming to an agreement.

Also, it’s likely President Biden wants to maintain the financial stability, credibility and prestige of the U.S. He can’t accomplish this by defaulting on our country’s debt obligations.

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For a deep dive regarding the political showdown, read Capital Group’s article, Debt ceiling showdown: Should investors worry?

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Your Cash

If you have a significant amount of cash in your local savings or checking accounts, it’s worth considering that money market accounts are currently offering a return of approximately 4.5%, while short-term government bonds (3-12 months) are paying around 4.6%.

This is significantly higher than the return of a typical savings account, which is currently paying only around 0.05% or less.

If you’re concerned about liquidity due to short-term needs, there are solutions. Give us a call, we’re happy to discuss them with you.

–David Bunker, Financial Advisor & Fiduciary

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Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.

The Government’s Response, and its Implications on your Investments.

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While it’s been all over the news the last few days, it’s still very early in the process and, therefore, more information will be coming to light. My goal today is to provide insight and clarity.

Why is the bank failing?

SVB had a pretty classic run on its deposits, just like George Bailey in “It’s a Wonderful Life” – more people demanding their cash than SVB had on hand.

How does this happen?

First, banks only keep a fraction of their deposits on hand for withdrawal; most money is lent out to borrowers or invested. 

Second, as a result of the Federal Reserve raising rates from 0.0% to 4.50% over the last year, bond values have dropped. As SVB started selling their bond investments to raise cash to pay depositors, they locked in losses on those bonds which created a downward spiral on their assets. 

Clients over the last weeks and months withdrew more and more cash from SVB to either run their own business or to invest in the now higher-yielding government bonds or money market accounts. 

The Federal Reserve, Treasury Department, and FDIC announced yesterday that all depositors will have access to their funds whether the value is at the insured $250,000 level or above. 

Additionally, the government will make funds available to all eligible institutions to meet the needs of their depositors. This strong and direct response is meant to reassure the public of the integrity of the US banking system.

The government was careful to mention that none of the above will be “borne by the taxpayer” but “by a special assessment on banks”. Additionally, SVB shareholders will not be protected and senior management has been removed.

I’ve been on several investment firms calls over the weekend and this morning. The consensus is that these steps by the government are positive and direct. As I mentioned above, it’s still too early to know completely. 

As to the impact on your portfolios, so far in 2023, we have seen much volatility, and the current banking situation is more of that. Your portfolios are very broadly diversified to mitigate risk. 

As uncomfortable as the current volatility is, it can create long-term opportunities.

Lastly, the Federal Reserve is nearing the end of its rate hikes. While the impact of those rates will be felt for some time, the stock market is a forward-looking mechanism, and with discipline and focus it will provide solid long-term growth.

Here’s a good article summarizing the SVB situation.

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Please feel free to reach out to me to discuss this in more detail.

–David Bunker, Financial Advisor & Fiduciary

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Before You Go

Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.

Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.