Tony Denk’s Commentary — April 2023

“A bull market is when you check your stocks every day to see how much they went up. A bear market is when you don’t bother to look anymore.” ~John Hammerslough

As we entered 2023 there was a lot to worry about. 2022 ended with both stocks and bonds down double digits. The Fed raised interest rates seven times and inflation surged to a 40-year high. Q1 was full of quick market movements and sharp reversals. Throw in geopolitics, spy balloons and bank failures, both U.S. and Swiss, and it’s not hard to be pessimistic. However, the 3-31-23 Market Summary shows an average return of 5.48%. After subtracting the (official) inflation rate of 1.7% we had a real (net of inflation) return of 3.78% hooray! That is the second straight quarter of positive returns, however, the 12-month numbers show that we still have a way to go for new highs in the market indices.

In assessing the health of the market, market technicians begin with price levels, they also measure volume, showing how many shares are changing hands, and they consider market breath, showing how different sectors and industries are performing. A healthy market advance has rising prices with rising volume and broad participation meaning most sectors and industries are rising. While Q1’s average return was positive, it was a narrow advance considering that the tech-heavy NASDAQ was up 16% while the DJIA gained less than 1%. The large cap technology leaders such as Amazon, Apple, Facebook, and Tesla turned up after leading the market down last year. Using a military analogy, the generals are leading the way up. Will the troops (the rest of the market) follow, or will the generals turn back down? Time will tell. Also, it is notable that the foreign stock EAFE outperformed the U.S. S&P 500 for the quarter and the year and gold had the second-best returns after 3-month treasury bills.

Back in February I wrote, “There are currently two camps regarding our near-term future.

The Bulls see inflation moderating, thereby allowing the Fed to stop raising interest rates by mid-year and possibly reducing interest rates by year end. That would be considered a soft landing without a recession. That would mean the worst is behind us as the forward-looking market has already fully discounted last year’s slower growth and higher inflation.

The Bear case is that inflation will remain higher for longer, causing the Fed to keep raising interest rates until we do have a recession. The recession will reduce employment and consumer spending. Reduced spending will hurt corporate earnings, pushing stock prices lower, as a recession is not currently priced into today’s valuations. That would be a hard landing.”

To the Bear case I would add the effect of rising interest rates on consumers. The U.S. personal savings rate was 4.6% in February. That is well below the 7.8% pre-Covid rate in January 2020. Wages have gone up but have not kept up with inflation. Consumer credit rates have soared. U.S. consumers now carry a record $986 billion of credit card debt at an average rate interest rate of 19.07% (Yahoo quoted Federal Reserve Bank of NY it was in First Trust Market Watch on 2-27-23). New and used car prices have risen over 20% since 2020 and higher interest rates have compounded the effect on consumers. The average car loan interest rate is now 8.95% for new and 14% for used, bringing the average monthly car payment to $784. (Quoted in First Trust Market Watch on 4-10-23).

As I reread that above paragraph and consider the major effect that rising interest rates have on American consumers, whose spending accounts for 70% of the U.S. economy, I can’t see how we don’t end up in a recession. I just don’t know when or how severe it will be. I guess that puts me in the Bearish camp, for now, I’m just sayin’…

To balance that out let’s take a look at historical market cycles. The four-year presidential cycle is one of the most established long-term market cycles and I have repeatedly written about it. The chart on Page 3 shows that the third, (pre-election) year has historically a strong performer. The reason being that the administration in power, (of either party) has done all they can, (cut taxes, lower interest rates, etc.) to boost the economy going into the election year. If some of those things were to happen in the near future, perhaps we would see 2023 have a DJIA return in the ballpark of the 15% long-term average. What about the Inflation Reduction Act? some might ask. That is a good question. As of early April, DJIA is lagging. See chart below.

I recently read The Truth About Your Future by former financial advisor Ric Edelman.

The book is very positive regarding how advancements in healthcare will prolong not just our lifespans but also our healthy productive years, and that nursing homes will become obsolete. That is great news! That also means that we will need more money which includes working longer as well. Edelman states that traditional long-term careers with only one employer or in one industry will change to a more ‘gig’ economy with workers needing to be re-schooled or re-trained every few years to keep up with changing technology.

On the subject of U.S. Social Security. Will we get some adult supervision to shore up the system before it becomes a crisis? The ‘trust fund’ is projected to be depleted by 2034 meaning beneficiaries would have to then take a 23% reduction in payments. Some combination of raising taxes and/or reducing benefits starting ASAP would go a long way. Especially now that we have firsthand experience on how excessive money printing affects the economy.

Summer Migration Debbie and I are looking forward to a family visit in Missouri and then heading back to our condo in Oshkosh from about Memorial Day to Labor Day. It is a beautiful place to spend the summer. I am looking forward to our annual visits with our Midwest clients and, maybe this year we will finally make it to Polka Days in Pulaski!

R.I.P. to brother Bob On a sad note my brother Robert, who lived in Detroit passed away on April 14th from complications of AFIB. It was a shock to all of us. He was only 71. Bob went off to college when I was only six years old, so we did not spend a lot of time together as kids. One bright spot is that we began to talk often starting when the Covid lockdowns began and that continued right up to his death. Debbie and I just spent a week in the Detroit suburbs and were impressed to learn that while Bob had career success, he found his greatest comfort in family stability similar to the way we grew up. A link to his obit is attached to this newsletter.

Wishing you peace,

Tony Denk, CFP, ChFC

Don’t read this newsletter if you are allergic to reading newsletters. This newsletter may contain forward-looking statements. This is intended for educational purposes only, and the opinions included do not constitute investment advice or a recommendation to buy, sell or transact a security. Past performance is no guarantee of future results, and actual results may vary from those described. If you are receiving this commentary via email and would prefer not to, please let us know either by email tony@denkinvest.com or phone 602-252-8700.

Securities offered through representatives of Lincoln Financial Securities Corporation, Member SIPC.

Branch Office: 10000 N 31st Ave. Suite D406A, Phoenix, AZ 85051 (602) 252-8700

Advisory services offered through Denk Strategic Wealth Partners, a registered investment advisor.

Denk Strategic Wealth Partners is not an affiliate or Lincoln Financial Securities Corporation.

LFS-5647356-042523