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  • Writer's pictureMichael Handy

Third Quarter 2023 Newsletter

Third Quarter 2023 – The third quarter of 2023 reduced the gains for the year-to-date and for the one-year period. No area was spared, with real estate (-9.86%) faring the worst. The large company stocks (DFUSX) performed well for the one-year (21.6%) powered largely by big tech; (AAPL, MSFT, GOOGL, AMZN) among others. Bonds (PIGIX) have not fared well because of the rise in interest rates. The value of bonds is inverse to interest rates, meaning when interest rates go up, the value of bonds go down.   

           

         

            Statistics are from Morningstar Advisor Workstation which are considered reliable.

 

What’s ahead for the market – Depends upon interest rates. The Fed has increased interest rates several times over the last couple of years to the current rate of 5.5%. Other rates accompanied by market forces follow the rates up. Increased interest means lower profits for businesses. Commercial real estate is affected by less cash flow from properties as well as increased vacancy rates. For individuals, the interest rate increase is felt in auto loans, bank lines of credit, and mortgage rates.    

 

Covid recovery – At times overlooked in short term thinking is that our world is still in Covid recovery. Learning to live with Covid and getting booster shots. More masks are worn in public. For businesses, Covid changed many long-term projects which were delayed or discontinued. Knowledge workers got comfortable working from home. Inventory levels for consumer goods like cars are still light. Many wanting new vehicles put their names on waiting lists, not the best position to bargain for a lower price and better terms.

 

The US has done better than most parts of the world in Covid recovery. Of course for the individual, the comparison is not how much better things are here than Europe, but comparing prices and availability here from three years ago.   


Microchips War – The availability of micro-chips has become a matter of national security. The world today cannot function without micro-chips. Companies including Taiwan Semiconductor) are building huge facilities in the US in an effort to decrease dependency on importing microchips from abroad. Early estimates say the US-made microchips will be more expensive to manufacture here, but decrease in price through efficiencies over the long term.

 

Gross Margins – AAPL has a gross sales margin of 43.31%, while Ford has a gross sales margin of 14.97%. Presumably higher chip prices would affect lower gross margin businesses like Ford more than high tech businesses.  

 

Home Loans – 30-year home loans were 2.96% in 2021 compared to 7.6% now. Projections of rate increases to 8% have priced many first time home buyers out of the market for the homes they want. First-time homebuyers purchase homes primarily based upon monthly payments. Current home owners with 3% mortgages are reluctant to sell and take on an 8% mortgage for a new home. With home prices easing, return on equity for homes is also declining.

 

Utilities Sector – This has been a core investment in most portfolios for many years. The current dividend yield is 3.7%, and is often considered a ‘bond substitute.’ The strategy involves a reasonable dividend plus earnings leading to improved total returns over the years. Interest rate increases have affected that strategy. The current annual total returns for utilities are shown below.

         


1yr

3yr

5yr

10yr

15y

VPU - Utilities

-7.34%

2.78%

4.78%

7.98%

7.87%

 

Like many of our core investments, we enjoy the dividends while waiting for conditions to improve. With this investment in a growing IRA account, a $10k investment ten years ago would be worth more than $20k today with compound interest and reinvesting dividends.

 

Politics and the Market – The 2022 elections showed voters were most interested in employment, inflation, women’s health choices, job security, and fair elections, according to Barron’s and other news sources. The focus of Congress today is electing a new Speaker of the House since the prior speaker was booted from his post. The current Republican frontrunner for President in 2024 is facing civil and criminal indictments. What is happening before our eyes looks like a plot from a terrible movie, but is part of our daily lives being captured by primary news cycles.

 

Auto Strikes – UA auto workers on strike remain unsettled. Looking at the matter as an investor, Ford has a 14.97% gross sales margin and an annual ten-year return of 0.30%. Toyota has a 17.81% gross sales margin and an annual ten-year return of 5.07%, data according to Morningstar. Toyota has four plants in the US, the first opened in 2003.

 

Perhaps churlish, but the auto unions should be focusing on companies like Toyota, not executive compensation at US companies. Investment dollars follow profit as water seeks its own level. We rightfully take pride in our American cars, and the companies need to be healthy and profitable to stay in business.

 

Budget and National Debt – The breakdown of the national budget in major areas is as follows:      

Health

28.0%

Social Security

25.3%

Defense

16.2%


69.5%

 

So the question for our esteemed members of Congress is, “If you want to reduce our national budget, what are the cuts you propose for the major areas?” We sit on pins and needles awaiting the response which will cast light on their brilliance.

 

Meanwhile the national debt was $5B in 2000 and is $33B today. The presidents during this span were Clinton, Bush, Obama, Trump, and Biden. Trump alone raised the national debt $6.7B. Biden has so far increased the debt by $3B, a lot of that related to Covid.

 

Acknowledging Debt – Nikki Haley seems to be the only Republican candidate that acknowledges both parties have contributed to the national debt. The old saying, you can’t change what you won’t acknowledge applies.


Elder Financial Abuse and Fraud Prevention:

Protecting yourself and others from fraud starts with prevention. (Information from Oregon Division of Financial Regulation)


Signs a Scammer May be Targeting You:

  • Contacts you out of the blue

  • Claims there is an emergency

  • Asks for personal information

  • Requests a wire transfer

  • Asks you to buy a gift card

  • Says you won a lottery you never entered

  • Tells you to keep it a secret

  • Claims they are the federal government; they are not

  • ​If it sounds too good to be true, it is

Signs Someone You Are Helping May be a Victim of Financial Exploitation:

  • They have unknown charges on their credit card or withdrawals from their bank account

  • They are excited about a secret cure, a great investment, or a long-distance romance

  • They make uncharacteristic purchases or give unusual gifts to caregivers or others

  • They fail to pay bills or keep appointments

  • They fear a family member will put them in a nursing home

  • They worry someone changed their mortgage, trust deed, or will without them knowing

  • They are defensive, deny a problem, do not want to report, and show fear of being embarrassed​

Visit the division’s protect yourself and others from fraud pages for more tips and information on preventing, reporting, and recovering from fraud. https://dfr.oregon.gov/financial/resources/Pages/index.aspx

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