Mullooly Asset Management
Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ
Mullooly Asset Management
Stocks, Treasury Bills, and Market Predictions: Your Questions
Ready to crack the code on some of the most perplexing questions in investing? We're about to take a deep-dive into the captivating world of stocks, Treasury bills, bond yields, and interest rates. Prepare to challenge the status quo as we probe whether it's worth risking money in stocks when Treasury bills yield 5%. We'll weigh the impact of inflation on this intriguing decision and stack up the historical returns of stocks against T-bills. Stay with us as we scrutinize the pros and cons of locking in good bond yields and making money when interest rates fall. We assess the pulse of the Federal Reserve, reminiscing their past rate increase while anticipating their future maneuvers. Our conversation wouldn't be complete without a candid chat on market timing and the potential risks it carries.
Transitioning into the current state of the market and economy, we explore the unpredictable nature of markets and debunk the anticipated recession predictions. We address your concerns about consumer debt and the impending election, assuring you that our economy is robust and resilient. Tune in as we furnish you with compelling statistics and historical data that will empower your discussions with family and friends during the holiday season. This episode is a blend of in-depth analysis, insightful discussion, and practical advice that will equip you for your investment journey. Let's demystify these complex topics together!
Welcome back to the podcast. This is episode number 462. I am your host today, tom Malooly, and let's jump right into it. Depending on when you're listening to this, this may be the way to win Thanksgiving dinner. We're going to cover topics that we have been asked, questions we have been asked by clients and by callers over the last couple of weeks. Things that are on people's minds, that are, in one way or another, might be forcing them to make or not make investment decisions. So let's jump right into it. We've got six of them that we're going to cover, and I want to give a hat tip to the New York Post and Ken Fisher, who echoed the same topics that we're going to cover in this podcast.
Speaker 1:So, number one why risk money in stocks when Treasury bills T bills are yielding 5%? That's a real question that we have been getting multiple times a day for the last several weeks. Here's how we would address this. You have to remember that inflation is at 3.7% at the time that we're recording this, in November of 2023, you're earning 5% on a T bill. Maybe that T bill is six months, maybe it is a year, maybe it's, you know, maybe you've got a Treasury note that's going to come due in 18 months, two years, something like that. Inflation is at 3.7%. That takes away three quarters of that 5%. It evaporates due to inflation. So really you're left with a net return before tax of 1.3%. Now, historically that sounds about right. The net real rate of return, that is the nominal rate, 5% less the rate of inflation right now that's 3.7%, the real rate of return 1.3%. And historically that sounds about right.
Speaker 1:I'll also add something else that a lot of people lose sight of is that inflation has averaged since 1926. So we're going on almost 100 years. Inflation has averaged 3%. In the same period stocks have returned much more. In fact Ken Fisher uses 10.1% for the returns on stocks since 1926. Now I don't know what index or what yardstick Ken Fisher is using. The Dow has certainly been around since the 1890s, but the S&P 500 has only been around since the 1950s, so I'm not really sure what yardstick he's using. I will only say that it really doesn't matter where you draw the line 1946, 36, 26. Over long periods of time stocks have returned much more than the rate of inflation.
Speaker 1:I'll also go on to add a little more here Treasury bills. They are taxable on the federal level and they're taxable as income. It's not even taxed at capital gain. So you do get a small tax break because you don't pay state income taxes. If you happen to live in a state where you have state income taxes, that's exempt. So there is a little more to the yield that comes with that.
Speaker 1:But you take 5 percent. That's on a T-bill right now. That may only be for six months, depending on how long you lock it up, for Inflation is currently running at 3.7 percent. So take away about three quarters of that, you're left with 1.3 percent. You have to pay federal tax on that. You're not really left with much. You are actually ahead of where you were just a short while ago, when interest rates were down near zero and inflation was about the same. You actually, after tax you might have had a negative return.
Speaker 1:Why take a chance on stocks when treasury bills are yielding 5 percent? It's usually the sign that there is some kind of turmoil or anxiety in the market, and so when CD rates and T-bill rates get people's attention, it's probably not a bad time to be looking at stocks either. We're not market timers and we're not trying to make a call, but it's important to just keep in mind. When the risk is high, it's probably not a bad time to be looking at putting money to work. From the complete opposite end of the spectrum, we're now getting questions from folks who are saying, hey, can't I lock in some good bond yields now and make money? Because, hey, tom, I know that when interest rates go down, bond prices go up and so when interest rates fall, these bonds should give us a pretty good return. Right, Let me answer a question with a question which I know I'm not supposed to do. Are interest rates going to fall? Are they going to fall anytime soon? Are you sure? That's three questions, sorry.
Speaker 1:Every time that this comes up, I take a pause to the conversation just to remind folks that the Fed raised rates from 0% to 5.25% on short-term interest rates. They did this in 14 months. That is lightning quick. So the Fed went from 0 to 5.25 or 525 basis points in 14 months. Honestly, if you said that to any market strategist or economist in the last 40 years, they would have told you that we were all going to die or that there was going to be an economic crash we've never seen before. It would be very bad for the economy in general. I'll have news. The Fed did all of this in a 14-month period. We didn't die. We're still here to talk about it and, in fact, the market has recovered very nicely and we didn't crash the economy. In fact, third quarter GDP, the gross domestic product, was up almost 5%. It was up 4.9%. So question for you in return.
Speaker 1:So a question again does the Fed need to lower rates? I don't know. I don't think so right now. I don't think they need to lower rates at all. And all of these, these folks that are out there making predictions that the Fed is going to cut rates two times next year, three times next year. There was an article over the weekend in Forbes that said that the Fed is going to be cutting rates four times in 2024. Where are they getting this from? They are projecting that the economy is going to slow down and that the Fed will need to act. I, I don't know. I I'm not going to make a prediction, but I don't really see the need for the Fed to be aggressively cutting rates. And so, if rates are going to stay where they are, or maybe down a little tick, I think the bond arbitrage trade, the hey, let's buy bonds because we're going to see a snapback in yields a snap, you know, move down in yields. I don't know if that's actually coming and I I wouldn't. I wouldn't put money at risk in something like that.
Speaker 1:The next point that we get asked a lot is what about the earnings recession? Isn't that going to hurt stocks? Isn't that going to drag the market down? I have an interesting statistic for you. As of the date of this recording we're recording this in the third week of November of 2023, 88% of the S&P 500 companies have reported earnings for the third quarter. Earnings are up. They're up over 4% and earnings per share are. It's not just coming from cost cutting either. For many companies, sales, the top line revenue, is up as well, and so, with seven out of eight S&P 500 companies already reported earnings, we are not seeing an earnings recession. In fact, we're continuing to see earnings growth. Okay, another question that we're getting asked quite frequently in the last few weeks what about the Middle East? What about that? I'm not trying to belittle the situation, but Gaza, lebanon we're talking about. When you're looking at global GDP, it's a half of 1%. The Middle East wars historically will spur a spike in oil prices, but, very interestingly, I'll point out that the major oil companies are not involved, and so we've actually seen oil prices. Go look it up. Oil prices have actually fallen below where they were when things started in the Middle East on October 7th.
Speaker 1:Things are not unfolding the way people expect, and that kind of brings me to a larger point that the market tends to do the opposite of what most people are expecting. If you're listening to this podcast, you've probably read that over the last year, many economists and market strategists have been calling for a recession, and they have been wrong Most of the times. What's happening is these folks are opening up their college textbooks, their economics books, and they're saying when these things happen, when the Fed raises interest rates, when certain things unfold, you're going to see a recession in six months, in 12 months. That has not happened at all, and so I don't know if we're going to have a recession. I don't know if it's eventually going to land in our lap, but things have not gone by the textbook. Don't use textbooks when it comes to investing.
Speaker 1:Next point the consumer is completely tapped out. I have a hesitation about agreeing with this. I don't necessarily agree. Yeah, a few weeks ago, a lot of headlines that we saw, because credit card balances for the first time in history exceeded a trillion dollars. I mean, just think about a trillion, but one trillion of anything, one trillion M&Ms, it's a lot, it's a huge number. So a trillion dollars in credit card balances says whoa, whoa, whoa. You've got our attention. That seems like we're piling on the debt, but it's really.
Speaker 1:When you do the math statistic is only good if you have the numerator and the denominator. A trillion dollars in credit card balances represents 5.3% just over 5%, of after-tax revenue here in the United States. Now, by comparison in 2006 and 2007, prior to the meltdown that we saw in 2008, in 2006 and 2007, that number the credit card balances represented 8% of after-tax income. It's high and it's an uncomfortable dollar number, but it's not necessarily a level that we have been at before. It's not necessarily at a level that has invoked some kind of trouble in the past. I think we're gonna be okay.
Speaker 1:One other thing when we're talking about credit card balances, just 1.6% of all credit card balances are 90 days late. Yeah, there's some larger than there are some large credit card balances out there that we're starting to see. But when you talk about late payments, we are in good shape. So just 1.6% of all credit card balances are 90 days or more late and, incidentally, that is near a record low, and the record low was set a year ago, in the fourth quarter of 2022. So the consumer continues to act well, continues to carry the economy, okay.
Speaker 1:So then the next point that comes up. A lot is well, what about the election? What about politics? What about gridlock in Washington? What about all these things? I will tell you, it seems to be something that I seem to be talking about every four years or so, but gridlock wins. Gridlock wins again, and it usually does. When you've got gridlock in Washington, very little gets accomplished, and that's a good thing.
Speaker 1:We don't like change. Many times, change comes in the result of higher taxes. For you and I, I don't see the benefit in something like that. I'll also add that, just looking in history in election years, going back for the past 100 years, when you are looking at what the market will do in an election year, 83% of the time so it's every four years, so it's 25 years over the last 100 years In election years, since 1925, stocks are up 83% of the time. These are just some of the questions that we have. This is gonna be a dining table chit chat topics that you can launch into and win the conversation at the Thanksgiving Day table or conversations that you have over the next few weeks as we move into the holidays. If you've got questions, we'd be happy to talk about them with you. Feel free to reach out to us. But that's gonna wrap up episode 462 of the Malooly Asset Podcast. Thanks for tuning in.
Speaker 2:Tom Malooly is an investment advisor representative with Malooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Malooly Asset Management may maintain positions in securities discussed in this podcast music.