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  • Writer's pictureMichael Handy

Second Quarter 2023 Newsletter

Second Quarter 2023 – The second quarter of 2023 continued the recovery that began in the fall of 2022. The large company (DFUSX) gains were heavily influenced by tech companies AAPL, GOOGL, MSFT, and AMZN, among others, since they have significant weightings in the fund portfolios. Small companies (DFSTX) showed nice gains for the period. International (DFIEX) showed improving returns. We continue to allocate small amounts to international funds. Real Estate (DFREX) is in difficult shape due to increased interest rates and decreased occupancy. The 5-year bond suffered the same fate as real estate with increased interest rates.

Statistics are from Morningstar Advisor Workstation which are considered reliable.

Preferred Stocks – During the first six months of this year, our selection of investment grade preferred stocks outperformed the fund and ETF preferred stock pools. Your portfolios were invested primarily in investment grade large banks, insurance companies, AT&T, and utilities. Little was invested in other investment grade preferred stocks. The market is harsher with lower investment grade securities during a market downturn.

Investment grade preferred stocks purchased in the last year allowed investors the opportunity to lock in 6%+ returns for a two to seven-year period. Since the stocks were purchased at below par value of $25, there is also capital gain potential if the preferred stocks are redeemed for $25 on their call date. If the stocks are not redeemed on the call date, you as the investor continue to receive 6%+ dividends. These dividends are taxed at preferable capital gains rates.

Portfolio Changes in Cash – US Treasury investments have increased in most of your portfolios. These investments can be in US Treasuries themselves or in low-cost ETFs holding US Treasuries. Cash in your portfolios is transactional cash, money market transactional cash, and US Treasury cash. Transactional cash provides for security purchases and distributions. Transactional money market funds pay interest of about 0.4% and is in your TD Ameritrade sweep account. Short-term and mid-term treasuries are currently paying 3% to 5%. At some point, these short-term interest rates will decrease.

What’s ahead for the market? – The big related issues are a recession that continues to be kicked down the road, and another couple of 0.25% bumps in the interest rates by the Fed. The market has absorbed a 5% bump in the past year, so another 0.5% bump should be accommodated. The market rises based on increasing sales, profits, and cashflow. The price/earnings ratio is on the high-end meaning securities are richly valued.

Politics and the Market – The 2022 elections showed voters were most interested in inflation, women’s health choices, job security, and fair elections, according to Barron’s and other news sources. The country is in the middle of a culture war with deeply divided interests. Some refer to it as the Ununited States of America. With five quarters to go, the presidential race appears to be a battle of the Octos with the leading candidates averaging 80+ years of age. One recent poll from ABC shows that 70% of Americans want neither of the leading candidates.

Budget and National Debt – Recently Congress had a bombastic showdown about raising the debt ceiling. Neither party will claim responsibility for the national debt increase, and each party made dramatic points before a deal was struck. The market didn’t price in a default on US debt.

The national debt was $5B in 2000 and is $31B today. The presidents during this span were Clinton, Bush, Obama, Trump, and Biden. Trump alone raised the national debt $6.7B. Republican outrage at increasing the national debt disappeared during the Trump years. Biden has so far increased the debt by $3B, a lot of that related to Covid.

Social Security – Continuing in the news because the shortfall grows closer. Beneficiary payments increased 5.9% in 2022 and 8.7% in 2023. Congress doesn’t like to deal with social security and Medicare because any discussion of a decrease creates an uproar among older people receiving benefits. Seniors vote, make campaign contributions, and write letters.

Several ideas have been suggested to shore up social security. The program began in 1935. Congress decided the trust fund would be invested in Treasury bills. This seemed sound at the time since the US was in the middle of a depression and the stock market was considered highly speculative. The investment pool has continued in Treasuries to this day.

Several attempts have been made to allow portions of social security to be invested in an index approach to the market. The states use the market for retirement funds. This will be suggested for the current fix and may succeed this time.

Social Security Proposals – A much discussed proposal is to increase social security contributions by an unlimited 6.2% withholding on earnings and a 6.2% employer match. At present, social security withholding and the related employer match is on the first $160,200 of compensation. Several proposals would increase the 6.2% withholding rate for both employer and employee. Unlimited 1.45% employee withholding and a related 1.45% employer match is currently done with Medicare. A related proposal would increase the age at which maximum social security can be taken.

Priced Out of the Market - Cars – The Fed interest rate and inflation rate miss the point for the average worker. Barron’s ran an article recently showing the average pretax wages for a 25- to 34-year-old at $4,000 per month. The financial guideline for a car purchase is 5-month’s salary or $20,000 ($4,000 x 5 months). The average price of a new car is $48,500. A 60-month auto loan at 6.58% would be $951 a month or 24% of wages for the average young worker.

Houses – A house purchase guideline is 2x to 3x annual salary. The median Oregon annual household income is $70,000. This would equate to a house price of $140,000 to $210,000. The median price of a house in Portland is $574,000.

History – In 1969 wages for a 2LT were $607 a month. Army officers were not paid a princely sum. A new Chevy Nova was $2,500 or 4.1x a junior officer’s monthly salary. In 1976, many homes in Lake Oswego sold for $40,000 to $65,000. One 4th year CPA made $24,000 a year with overtime and a side job teaching accounting and tax classes! A house bought for $62,000 in Lake Oswego was 2.6x annual salary. A median Oregon household income of $16,000 in 1976 would qualify for a $48,000 house ($16,000 x 3) with many available in that price range.

The point of history is that the numbers worked for the boomer generation coming into adulthood. They don’t compute today, with Oregon median household income of $70,000 pricing many people out of the market for cars and houses.

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