Returning to Normal

In our view, the three anchor points to a solid financial plan are: where are we now, where have we been and where are we headed.

Where we are now.

The markets have continued to experience heightened volatility as the Federal Reserve skirmishes with inflation on various fronts. The wisdom found in Ecclesiastes “there is nothing new under the sun” is comforting to some and frightening to others, but nonetheless appropriate here. We expect that the markets will continue to fret over the only historically proven tonic for inflation…higher interest rates, economic slowdown and recession.

The current lack of clarity rankling the market is best summed up by following quotes from two opposing economic camps:

"No rational person can look at the (economic) data and conclude we are in a recession", Brian Deese, President Biden’s Director of the National Economic Council Feb 2023

"We are just beginning to pay the price for (more than a decade of) interest rates at near zero", Sam Zell, storied real estate investor Feb 2023

Time will tell, but both the stock and bond markets seem to disagree with the conclusion of the recession deniers.

Where have we been.

While the current market volatility is certainly uncomfortable, a quick look back to 2020 will remind us of how extraordinary that economic climate was, e.g. the price of oil briefly dropping to negative $37 per barrel, the largest ever point drop and point gain for the Dow Jones Industrial Average occurring just days apart (-2997.10 on 3/16/20 and +2112.98 on 3/24/20).

Saying ‘things have been worse’ offers scant comfort but underscores the good news in the data…things may be getting back to normal.

Where are we going.

We believe we’re on the path back to normal, and by normal we mean:

savers are finally being compensated (money market funds paying interest after years at near zero)
mortgage rates are less than a percentage point away from their long-term averages
after climbing above 9%, inflation may be showing signs of tapering off

We expect that returning to normal will have some negative consequences as seen in the recent slowdown in existing home sales, mortgage originations, etc. but as Sam Zell concluded, there will be a price to pay for the artificially low interest rates of the recent past.

While there is great comfort in returning to the familiar, like getting a great night's sleep in your own bed after a long vacation, the trip home likely won't be without turbulence.