Bob’s Journal for 4/27/23

Banking Panic Causes Short-Term Rates to Plunge

The runs on Silicon Valley Bank and Signature Bank had historic effects on short-term interest rates.

Short-term interest rates rose steadily for almost a year after the Fed began its aggressive tightening in May 2022. The rise in short-term rates during 2022 was the fastest in at least 40 years.

But short-term interest rates made a sharp U-turn after the two banks failed.

The yield on the four-week Treasury Bill was 4.60% in the secondary market on March 31. On April 19, the rate was down to 3.68%.

That’s the fastest decline in short-term rates since at least the 1980s, according to Bridgewater Associates. The decline shows two things.

First, investors engaged in a flight to safety as the banks collapsed and opinions circulated about the potential for widespread bank failures. A flight to safety is normal when there’s increased fear of a financial crisis or panic.

Second, investors saw little advantage in venturing beyond short-term investments.

Often when there’s a flight to safety, investors spread their money among treasury debt of different durations. Cash is likely to flow into intermediate and long-term bonds as well as short-term debt. Yields on the longer-term debt will decline, and so the prices of the bonds will increase.

That didn’t happen this time. The iShares 20+ Year Treasury Bond ETF (TLT) gained some value in the last days of March and the first days of April, but then declined. The price of TLT was about the same on March 29 as on April 19 after a wild ride in between.

That indicates investors had a higher level of fear during this period than during most financial crises.

At the same time as short-term rates fell, real yields increased. Real yields are nominal interest rates adjusted for inflation. This could indicate investors shifted their views about inflation, fearing inflation might not decline as rapidly as they previously thought.

The result of the higher real yields is the values of inflation-indexed bonds declined. The iShares TIPS Bond ETF (TIP) fell steadily from April 6 through April 18.

Though it hasn’t made headlines for a few weeks now, the banking crisis isn’t resolved. There are a number of banks holding bonds and other assets that lost value over the last year. They remain at risk that depositors will take their money elsewhere, triggering the same liquidity problems Silicon Valley Bank and Signature Bank had.

When You Buy Stocks Makes a Big Difference in Long-Term Returns

Investors frequently are told that they are long-term investors, so they shouldn’t worry about fluctuations in the markets. They are told to invest and hold for the long-term.

But the data show that when you buy stocks makes a big difference in your long-term returns, according to Bespoke Investment Group.

An investor who made a lump sum investment in the S&P 500 at the end of 1979 and reinvested dividends would have an annualized return of 11.6% through early March 2023.

But an investor who purchased the index at the end of 1999 (before the tech stock crash) would have had an annualized return of only 6.4%.

Changing the starting date of an investment by even one year can make a big difference in long-term investment performance. An investor who purchased the S&P 500 at the end of 2007 would have had an annualized return of 9% through early March 2023. But delaying the purchase to the end of 2008 would have increased the annualized return to 13.3%.

Other studies, such as those by John Hussman, of Hussman Strategic Growth, found that someone who bought the stock index in 1999 or 2006 would have earned the same or a lower return as someone who bought only treasury bills.

It can make a lot of sense to suspend stock purchases or reduce stock holdings when stocks are highly valued, or the financial system seems shaky.

But you must make two decisions correctly. A number of investors sell or delay purchases when stocks seem more risky than usual. The mistake too many of them make is they don’t increase their stock holdings when the outlook improves.

Central-Bank Digital Currencies Are Coming

At least 114 countries representing 95% of the world’s gross domestic product (GDP) are considering digital currencies, according to The Wall Street Journal. At least four countries, with China being the most prominent, already have issued versions of digital currencies.

The internet is full of discussions about national digital currencies and their possible implications. At our recent Retirement Watch teleconference, a number of listeners were interested in hearing about a potential U.S. digital currency.

The U.S. Treasury and Federal Reserve currently are studying whether the United States should issue a digital currency and, if so, how to do so. Fed Chairman Jerome Powell said the Fed doesn’t believe it has authority to issue a digital currency and would need direction from Congress before doing so.

A central-bank digital currency (CBDC) would be simply a digital version of the current dollar. The two would co-exist for at least some time if a digital dollar were issued.

There are many potential ways a CBDC can be designed and issued, but there are two main versions.

One version of CBDC is designed for use by financial institutions. This CBDC would facilitate transactions between financial institutions and between the institutions and the Fed.

The belief is this use of a CBDC would be more secure than the current system and more efficient. Transactions would be settled almost instantly instead of taking days. The New York Federal Reserve Bank is testing a potential system.

The other version is a CBDC that would be available to the general public. Accounts might be held at the central bank or a commercial bank, depending how it is structured.

Having a CBDC available to the general public has many potential advantages and disadvantages.

Most current bank fees and delays in processing transactions might be eliminated. Bank accounts might be available to lower-income people who don’t use them today because of fees or minimum balance requirements. Of course, that might hurt commercial banks by causing people to shift their finances to no-cost accounts at the Fed. That’s why banks currently are not big supporters of a CBDC for the general public.

A CBDC also might prevent money from leaving the current financial system for private digital currencies. When money and transactions leave the financial system, it’s more difficult than usual for the Fed to influence the economy and inflation through its traditional monetary policy tools. So, a CBDC might give the Fed better control over monetary policy and enable it to make policy changes more efficiently.

For individuals, in many ways a CBDC wouldn’t be much different than the current forms of electronic payments and transfers. The main difference is you’d probably make transactions using an account or “wallet” at the Fed instead of a bank or brokerage account.

Privacy is a concern many people have about a CBDC that’s available to the general public, especially if the traditional currency is phased out and people are required to use the CBDC.

Governments could track every electronic transaction a person makes. They also could make it impossible to spend the CBDC on goods or services the government wants to prohibit. Selected individuals and businesses could be locked out of the system.

As with any new technology, it’s possible people will find ways to use or manipulate it that were not originally anticipated or planned for.

It is likely that if the United States does develop a CBDC, it will co-exist with the current system and be a digital version of the current dollar. Use of the CBDC would be optional. Over time, that might change based on the technology and public acceptance.

The United States is moving slowly on a CBDC, because of concerns about it. The government’s current interest in a CBDC seems to be due to concern that China might develop a CBDC that’s accepted internationally and begins to replace the dollar as the world’s reserve currency.

Because a CBDC in the United States isn’t imminent, there aren’t any actions you should take now. If a CBDC is developed, any actions you might want to take would depend on whether it is available to the general public, contains privacy protections and has other features.

The Data

Home prices increased 0.2% in February after declining 0.6% in January, according to the S&P Corelogic Case-Shiller Home Price Index.

Over 12 months, the index was up only 0.4% at the end of February after rising 2.6% as of the end of January. The 12-month growth as of the end of February is the lowest since 2012.

The House Price Index from FHFA increased 0.5% in February after gaining 0.1% in January. Over 12 months, the index is up 4.0% after climbing 5.3% at the end of January.

Existing home sales declined 2.4% in March after rising 13.8% in February. In March, sales were 22% lower than 12 months earlier. Sales were lower than the previous month in 13 of the last 14 months.

The median sale price of existing homes in March was $375,700, 0.9% lower than 12 months earlier. That’s the largest 12-month price decline since January 2012.

March’s median sale price was 9.2% below the record high of $413,800 reached in June 2022.

March was the second consecutive month the median home sale price was lower than the previous month. That’s the first time that happened in 11 years.

New home sales surged 9.6% in March, the biggest increase since August, after declining 3.9% in February. The number of new homes sold in March was the most in a year.

The median price of new homes sold was $449,800 in March, up from $435,900 in February. The average price of a new home sold was $562,400 in March, up from $511,800 in February.

Durable goods orders increased 3.2% in March after declining 1.2% in February.

Transportation equipment was a big part of the March surge. After excluding transportation, orders increased 0.3% in March after declining 0.3% in February.

Orders after excluding both defense and transportation declined 0.4% in March, which follows a 0.7% decline in February. This is considered a good measure of business investment.

The Philadelphia Fed Manufacturing Index declined to negative 31.3 in April from negative 23.2 in March. That’s the lowest level since May 2020 and the eighth consecutive month the index was negative.

The Dallas Fed Manufacturing Index tumbled to its lowest level in nine months in April, negative 23.4, from negative 15.7 in March.

The economy improved a bit in the first half of April, according to the PMI flash indexes.

The PMI Manufacturing Flash Index increased to 50.4 from 49.2. That’s the first time the index has been above 50 (indicating the sector is expanding) in six months.

The PMI Services Flash Index rose to 53.7 from 52.6 at the end of March.

The PMI Composite Flash Index was 53.5 in mid-April, up from 52.3 at the end of March.

The Consumer Confidence Index from The Conference Board declined 101.3 in April from 104.0 in March. The Present Situation component of the index improved, but the Expectations component declined sharply.

The Expectations Index fell to 68.1 from 74.0 in March. The Conference Board says a level below 80 is associated with a recession within the next 12 months.

New unemployment claims increased by 5,000 to 245,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.865 million from 1.804 million.

The Markets

The S&P 500 lost 1.96% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.26%. The Russell 2000 declined 2.79%. The All-Country World Index (excluding U.S. stocks) decreased 1.98%. Emerging market equities retreated 4.14%.

Long-term treasuries rose 2.65% for the week. Investment-grade bonds increased 0.83%. Treasury Inflation-Protected Securities (TIPS) added 1.24%. High-yield bonds fell 0.07%.

In the currency arena, the U.S. dollar rose 0.25%.

Energy-based commodities fell 4.17%. Broader-based commodities lost 3.98%. Gold declined 0.26%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. Come join our Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.