The trends aren’t friendly, warns Fiona Greig.
Philadelphia’s deputy budget director under Mayor Michael Nutter, J.P. Morgan’s top researcher on family finances, gig work and stimulus programs since then, Greig is the new head of investor research and policy at Vanguard’s Investment Strategy Group, tracking how households spend and save as the economy strengthens and slips.
To be sure, many people really built up their reserves during COVID, as many Americans collected three government stimulus checks, paid down debt, saved a bit more in their retirement plans, and took advantage of federal small-business, student-loan and housing aid, she noted Tuesday in a phone interview. Plus a labor shortage forced hourly wages higher.
But with interest rates and consumer prices up sharply and both stock and bond values way down in the past year, Greig said her team has spotted a couple of reactions worth worrying about:
- A record number of savers are taking “hardship loans” from their 401(k)-type savings plans. (About half of Americans have employer retirement or pension plans, though many have set aside only minimal funds.)
- More Americans have slipped a month or more behind on their credit card or auto loan payments, incurring higher fees and suggesting hardship is spreading for those whose meager savings are wearing out.
To be sure, these are signals, not storms. Only one-half percent of Vanguard’s 401(k) customers asked for hardship loans in the fall, though “that was higher than we’ve ever seen before,” Greig said.
And while home loan, credit card and auto loan late payments are all up since early 2021, they have mostly remained below pre-pandemic levels, according to data from the Federal Reserve Bank of New York.
But in both cases, it’s “the direction of change” that has investors worried, Greig said.
Aren’t companies still scoring record profits?
In many cases, yes, — but even with their highest-ever earnings, financial stocks are still down, according to a report out this week from Janney Montgomery Scott LLC’s capital markets group, headed by Joe Culley.
Many banks do profit from higher interest rates, which make it easier to raise their loan prices on borrowers, Janney noted, even though home purchases have slowed down as mortgage rates have more than doubled from what they were a year ago.
But “the market is always looking forward, and many investors believe that a recession, rather than a soft landing, will result from the Fed’s efforts to fight inflation,” and that many borrowers will be unable to pay their loans back, warned the Janney report.
Will 2023 will be less bad than last year?
“Not only has 2022 been a very difficult year for equities [the worst for the benchmark S&P 500 since 2008], it has also been the worst year for at least 50 years for the bond markets,” Prudent Management Associates, which manages $1 billion in client investments in Vanguard and other mutual funds from its Center City offices, told clients in a recent note.
Still, the Fed expects “broad inflation pressures” to fall this year; in time, interest rates will stabilize, and “markets continue to march ever higher over the long-term,” Prudent’s managers assured investors.
“Given the higher (bond) yields, the reduced valuation in (stocks), we think we are poised for modest returns going forward,” said Fred Snitzer, Prudent’s co-owner. “Though equities still aren’t that cheap. They are closer to the long-term averages.”
He said investors haven’t fled the markets, but the unusual drop in both stocks and bonds “did spark some conversations [among investors] about whether to change their assets” among different investment classes.
Will rich investors go private?
Private-equity investing slowed and in some sectors dried up last year. But Drew Schardt, head of global investment strategy at Hamilton Lane, the Conshohocken private-investment advisory and sales firm that counts giant pension plans among its clients, said some categories look promising.
He expects more interest this year in private-credit loans (at profitably high interest rates) to capital-starved midsized companies, renewable energy, liquified natural gas and other projects in European countries eager to replace Russian natural gas pipelines, as well as the resale of unwanted private assets by earlier investors.
“The worst is behind us in terms of inflation,” with interest rates likely to stabilize, Schardt said, but a broad slowdown, or even a recession, is still likely. Federal Reserve interest rates “are likely to remain elevated for awhile,” staying in the 5% to 5.5% range and slowing the bank borrowing that feeds the economy.
“We’re not out of the woods completely,” Schardt said.
Even municipal-bond investors, who buy the relatively safe, low-yield securities that fund state and local government building projects, face “a new layer of uncertainty,” Matt Fabian of Connecticut-based MMA Research warned clients in a newsletter Tuesday.
He noted interest rates for U.S. Treasury long-term debt remain lower than for short-term debt — a “yield-curve inversion” that warns investors expect overall rates to keep rising. He blames the resurgence in COVID hospitalizations and a potential new wave of viruses from China as that country radically reverses its former “zero COVID” policy, among other concerns sapping bond buyers’ confidence.
Are stocks done falling?
The drop in the stock market has at least made Vanguard’s 2012 predictions for return on investment over the past 10 years look a lot less conservative — and more accurate — than they did in the bull market, according to a report late last year by the company’s investment strategy group, headed by global chief economist Joseph Davis.
Thanks to “indiscriminate” dumping of U.S. and foreign stocks by investors, Vanguard now calculates the actual annual appreciation of a weighted list of U.S. and foreign stocks over the 10 years ending Sept. 30 was 8%, just a little over Vanguard’s 10-year-old prediction of 7.6%.
And the drop in values in 2022 has caused Vanguard to increase its projection of stock returns over the next 10 years by more than 2% — raising expected returns of U.S. stocks to a range around 5.7% a year, of other developed countries to around 8.2%, and for emerging markets to around 8%.
Still, in the short term, the team warns that U.S. stock prices have not yet fallen below the levels they typically hit in recessions.
Indeed, many U.S. stocks remain “overvalued,” the group concluded, because corporations are not likely to be able to raise their already high profits in the face of persistent high inflation, rising interest rates, and “the growing likelihood of recession.”
