Contrary to what many market forecasters were expecting back in March and April, when the banking sector appeared to be melting down, the markets have climbed the proverbial “Wall of Worry” over the past three months and delivered another strong, positive performance in the second quarter.
This is a common occurrence when it comes to financial markets. At certain points, fear seems to overtake reason — and does so without warning in many cases. However, often if you wait a while (sometimes a long while), all of that fear gets washed away and once again replaced with reason and commonsense. And in times like these, the patient investor gets rewarded!
Keep an eye on interest rates
The Federal Reserve and interest rates continue to dominate discussions of the economy. The Fed has indicated that they are close to relenting on their drive for higher interest rates — in an effort to reduce inflation. The current target range for overnight funds is 5.00-5.25%.
The Fed’s efforts have not been in vain as inflation has come down a good bit. And like it or not, the Supreme Court’s recent decision striking down President Biden’s student loan relief plan could also help further tame inflation as it keeps $400 billion of liquidity from sloshing around in the marketplace. Obviously, that’s cold comfort to those people who were counting on relief under the plan.
Labor markets remain fairly tight with the unemployment rate at 3.7% and labor force participation has continued to rise back up to pre-pandemic levels.
Housing prices have moderated somewhat, but the main shift in the housing market has been a much reduced level of activity compared to last year. After all, if you have a 3% mortgage, you’re loath to give that up by selling.
Areas of concern
Commercial real estate has become an area of concern for some market observers. Office vacancies remain historically high in the face of the “work from home” trend. All else equal: higher vacancies => lower rents => reduced property valuations. Combined this with higher interest rates — and the need to refinance existing property loans over the next few years — and commercial real estate owners and lenders have some tough choices in front of them.
During the financial crisis of 2008-09, the commercial real estate industry used a tactic called “extend and pretend” to avoid the worst possible outcome of foreclosing and taking possession of underwater commercial properties (as a rule, banks do not want to be in the business of owning properties).
Essentially, the lender and owner would agree to extend the maturity of the existing loan and pretend that the valuation had not fallen. This would buy time for the property owner to get through the rough patch and wait for valuations to rebound. At which point, the building is sold and the note paid in full. It’s likely that lenders will use this tactic in the current environment when feasible.
Another area of concern is the inverted yield curve. As I mentioned in previous editions of this market commentary, an inverted yield curve — short-term rates exceed long-term rates — has historically been a leading indicator for recessionary periods. Ideally, I would like to see the yield curve normalize over time.
Financial planning updates
Besides the cancellation of student debt relief that I mentioned earlier, there have not been any major updates around tax or financial planning concerns.
The results of upcoming elections (both 2023 and 2024) will go a long way toward driving policy direction in the near term. Many planners (including myself) are keeping a close eye on the expiration of the personal tax code changes from the Tax Cut and Jobs Act — which happen in 2026 unless Congress takes action.
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Market Commentary 2Q 2023
Market update
Contrary to what many market forecasters were expecting back in March and April, when the banking sector appeared to be melting down, the markets have climbed the proverbial “Wall of Worry” over the past three months and delivered another strong, positive performance in the second quarter.
This is a common occurrence when it comes to financial markets. At certain points, fear seems to overtake reason — and does so without warning in many cases. However, often if you wait a while (sometimes a long while), all of that fear gets washed away and once again replaced with reason and commonsense. And in times like these, the patient investor gets rewarded!
Keep an eye on interest rates
The Federal Reserve and interest rates continue to dominate discussions of the economy. The Fed has indicated that they are close to relenting on their drive for higher interest rates — in an effort to reduce inflation. The current target range for overnight funds is 5.00-5.25%.
The Fed’s efforts have not been in vain as inflation has come down a good bit. And like it or not, the Supreme Court’s recent decision striking down President Biden’s student loan relief plan could also help further tame inflation as it keeps $400 billion of liquidity from sloshing around in the marketplace. Obviously, that’s cold comfort to those people who were counting on relief under the plan.
Labor markets remain fairly tight with the unemployment rate at 3.7% and labor force participation has continued to rise back up to pre-pandemic levels.
Housing prices have moderated somewhat, but the main shift in the housing market has been a much reduced level of activity compared to last year. After all, if you have a 3% mortgage, you’re loath to give that up by selling.
Areas of concern
Commercial real estate has become an area of concern for some market observers. Office vacancies remain historically high in the face of the “work from home” trend. All else equal: higher vacancies => lower rents => reduced property valuations. Combined this with higher interest rates — and the need to refinance existing property loans over the next few years — and commercial real estate owners and lenders have some tough choices in front of them.
During the financial crisis of 2008-09, the commercial real estate industry used a tactic called “extend and pretend” to avoid the worst possible outcome of foreclosing and taking possession of underwater commercial properties (as a rule, banks do not want to be in the business of owning properties).
Essentially, the lender and owner would agree to extend the maturity of the existing loan and pretend that the valuation had not fallen. This would buy time for the property owner to get through the rough patch and wait for valuations to rebound. At which point, the building is sold and the note paid in full. It’s likely that lenders will use this tactic in the current environment when feasible.
Another area of concern is the inverted yield curve. As I mentioned in previous editions of this market commentary, an inverted yield curve — short-term rates exceed long-term rates — has historically been a leading indicator for recessionary periods. Ideally, I would like to see the yield curve normalize over time.
Financial planning updates
Besides the cancellation of student debt relief that I mentioned earlier, there have not been any major updates around tax or financial planning concerns.
The results of upcoming elections (both 2023 and 2024) will go a long way toward driving policy direction in the near term. Many planners (including myself) are keeping a close eye on the expiration of the personal tax code changes from the Tax Cut and Jobs Act — which happen in 2026 unless Congress takes action.
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.