Malvern Bank's "Money Matters"

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Rest Assured
The Sun WILL Come Out Tomorrow...

Those of us who have been in the investment industry have built a tolerance for market volatility if we have been around long enough. But that doesn’t make it easy for us, and we know it’s not easy for our clients. That’s why we try to be as proactive, and not reactive, to market cycles as we possibly can. The Fed will continue to tighten, this is all publicly documented, and their target for the Fed Funds rate is closer to 4.5% or 4.75% at this point, given the information they have. Inflation is proving to be persistent and clearly, they started raising interest rates much too late this year than should have happened. The lack of energy independence we had just a short time ago is gone, thus our gas prices will unfortunately continue to be way above our comfort level. Thus, the higher rates will simply cause an overall slowdown as prices on the supply side become way too high for demand, and an equilibrium is reached again. The Fed does not think that will happen until sometime in 2024. We are skeptical of that for some reasons below.

With a November election coming, it is highly likely that Congress will not be quite so much in a stalemate, and we may see two outcomes as result. 1) Statistically a better stock market ensues when there is a clear split in party from Congress and the Presidency, and, 2) we may get a Congress with fiscal restraint that in fact rolls back some of the more recent controversial and unnecessary (for right now) spending bills related to higher education loan forgiveness, Ukraine military aid, and a host of other items that have poorly been timed with no thought to taxpayers going through this inflationary cycle.

We are going into earnings season, and some companies are already pre-announcing and lowering earnings guidance. We have been expecting that, partially from a slowing economy going into the full throes of recession, and partially from a dollar that is too strong which affects the multinational companies when they must use the exchange rate to bring dollars back from overseas. This is all normal and is part of a normal economic cycle –mind you, we have not been in this part of the cycle since 2007.

For our clients, depending on their goals and risk tolerance, we have tried to keep them in much higher cash levels this year than normally. That also means we are always looking for when to put it to work. We think purchasing long term core equity positions will come soon, but it’s not time. We are more focused on purchasing fixed income now, to take advantage of the higher yield in the short end of the curve with the 2-year Treasury sitting at 4.3% at the time of this writing. What that means simply is that we will use this window to buy good quality fixed income securities that are longer dated in order to lock in better prices and yields. This includes municipals as well, where appropriate. This strategy should prove out well for long term investors because rates WILL decrease again, somewhere in the latter part of 2023 in our opinion. That means the bonds purchased today, will become a lot more valuable in a falling interest rate environment.

And ... in case it was missed, mortgage rates crossed over 7% this past week. A 30-year rate has not been this high in almost 20 years! The result has been a huge drop in applications, which of course in turn means real estate prices will finally start to show some meaningful signs of leveling off or slightly decreasing. Remember, we still have a housing shortage so that supply and demand equilibrium is still in play.

If you are in the middle of a real estate transaction or considering the purchase of something now, perhaps look at a 5/1 or 7/1 ARM to keep that rate as low as possible now but have room to refi down to a better rate sometime in the future.

Happy Fall !

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