A tale of two economies

Heading into the final quarter of 2023, we are looking back on a year of growing pains, between moving offices and changing custodians. We want to thank you for your patience with us through this process. Regrouping and taking stock before the next step are a part of how we all approach life, and we are excited to be making this pit stop in our temporary office before welcoming you in mid-2024 to our permanent home, in a building we co-own.

In the broader economic environment, we are facing similar growing pains. Within the typical cycle of the economy, growth follows recession follows growth. The economic machine gets on a roll and needs to cool off before continuing expansion. For the past year and a half or so, the stock and bond markets have been volatile. Where 2022 was primarily a down year for stocks, 2023 has been a year of recovery, but the bond market has been hit hard throughout that time. Economists have been talking about whether we are in a recession, which would be our first “natural” recession since the Great Recession—March of 2020 being a very different, and short-lived, experience. The answer is: maybe. The manufacturing sector of the economy has been in a recession for about the last year, but it only covers 8% of American jobs. However, the 78% of the economy that focuses on services has continued to expand. If there is currently a recession, it is limited to a very small, very specific part of the broader economy.

We are keeping an eye on some bellwethers of the economy. Things like growth in employment, lending by banks, and long-term interest rates top the list. The job market has stayed strong, despite interest rates remaining high and bank lending continuing to decline. We are also watching national events like the start of student loan repayments, which will affect households’ ability to save and spend, and the potential for an auto strike or a governmental shutdown.

The question we receive regularly from clients is, what changes should I make to my investments when we see up and down returns, or if it looks like we are about to transition into a different stage of the economic cycle? Our advice is to avoid making any big moves. What determines your mix of stocks and bonds is your stage of life and comfort level with risk, and we always invest with the long-term in mind. Of course, we make changes within the stock portion of our models, or within the bonds. For example, in July we reduced our exposure to technology stocks a bit to increase diversification with other types of stocks. We increased the percentage of higher-yielding bonds within that side of things as rates continued to climb. We expect to make further changes in the next week or two.

As always, it’s the financial plan we’ve created together that guides our decision-making process. If you have any questions or want to set up a time to connect, please don’t hesitate to reach out to me.