October, 2022
A Tumultuous Week
U.S. stocks were under pressure last week due to recession concerns and unsettled trading in the bond and currency markets. This stress followed economic steps out of the U.K During the previous week, the Bank of England (BOE) raised interest rates, and its prime minister announced unfunded tax cuts that the markets interpreted as inflationary.
US Bond yields rose early last week, sending stocks lower until Wednesday's rally following news that the BOE would buy U.K. government bonds. U.S. stocks resumed their descent the following two days to close out a disappointing week, month, and third quarter.
The Bank of England Acts
Global bond and currency markets have been volatile recently due to global central bankers raising interest rates to combat inflation. Developments in the U.K. took center stage last week when the BOE announced it would be buying long-dated U.K. government bonds. Upending the financial markets was the previous week’s announcement of tax cuts by the country’s new prime minister, a step many investors viewed as counterproductive to the BOE’s inflation-fighting efforts. The BOE’s decision to begin temporary purchases of government bonds was well-received by capital markets, sending U.K. bond yields lower and boosting U.K. stock prices in the immediate aftermath.
Tempered Optimism
The third quarter of 2022 saw financial assets continue their year-to-date decline, as positive stock-bond correlations and a pullback in commodity prices delivered negative returns across all asset classes except cash. A third consecutive rate hike of 75bps from the Fed piled further pressure on bonds, with U.S. fixed income markets down 4.8% in the third quarter. Additionally, the combination of rising rates and growing concerns around a policy error leading to recession led global high yield to decline 2.7% in the third quarter. Although credit quality has remained relatively stable this year, slower growth, persistent inflation, and higher rates could increase credit risk over the next few months. Turning to equities, U.S. large cap and small cap equities found little relief in the third quarter, as a further deterioration in multiples and declining earnings expectations led to negative returns. In international markets, developed market equities fell 9.3% as European markets continue to be challenged by higher energy costs and a negative reaction to the U.K.’s recent fiscal and monetary policy. In emerging markets, equities were down 11.4% as rising inflation across geographies and questions about China weighed on returns.
Although the fourth quarter looks set to be another tough quarter for public markets, investors should not be overly pessimistic. S&P 500 forward multiples are currently ~9% below their long-term average, while high quality fixed income valuations are currently sitting at 10-year lows. These attractive valuations, coupled with elevated interest rate and equity volatility, should be welcomed by investors, as a combination of the two has historically led to significant long-term investment opportunities.
Mid-Term Elections and the Market
Another thing to keep your eye on for the fourth quarter is election day. Stocks have tended to perform best when the same party controls the executive and legislative branches (13.7% per year on average) and if they maintain control after the mid-terms (22.5% on average). As we know, however, past performance doesn't mean future results, so we'll see what this year's election brings.
Your Emergency Fund: How much is Enough?
Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up on a first-name basis with the nurse at urgent care. Then, as you're driving to work, you see smoke coming from under your hood.
Bad things happen to the best of us, and sometimes it seems like they come in waves. That's when an emergency fund can come in handy.
One survey found that nearly 25% of Americans have no emergency savings. Another survey found that 40% of Americans said they wouldn't be able to comfortably handle an unexpected $1,000 expense.1,2
How Much Money?
How large should an emergency fund be? There is no “one-size-fits-all” answer. The ideal amount may depend on your financial situation and lifestyle. For example, if you own a home or have dependents, you may be more likely to face financial emergencies. And if a job loss affects your income, you may need emergency funds for months.
Coming Up with Cash
If saving several months of income seems unreasonable, don't despair. Start with a more modest goal, such as saving $1,000, and build your savings a bit at a time. Consider setting up automatic monthly transfers into the fund.
Once your savings begin to build, you may be tempted to use the money in the account for something other than an emergency. Try to resist that urge. Instead, budget and prepare separately for bigger expenses you know are coming.
Where Do I Put It?
Many people open traditional savings accounts to hold emergency funds. They typically offer modest rates of return.
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts for up to $250,000 per depositor, per institution, in principal and interest.3
An attractive alternative to a traditional savings account (while still maintaining FDIC protection) is an online savings account. These types of accounts typically offer higher rates of return. One thing to consider is there is typically a one- or two-day delay in transferring funds from an online savings account to your checking account.
Depending on the size of your emergency fund, one could consider government I bonds as a portion of the war chest. These bonds have some restrictions, so they likely aren't appropriate for your entire emergency fund. Please let us know if you have questions about where you should maintain your emergency fund.
The only thing you can know about unexpected expenses is that they're coming. Having an emergency fund may help to alleviate stress and worry that can come with them. If you lack emergency savings now, consider taking steps to create a cushion for the future.
Wellness - It's What We're About
While GTS Financial focuses on helping you navigate your financial life, we also hope to positively influence and encourage your overall well-being. We intentionally include articles on health, fitness, mindset, and more in our newsletters because we all know there's more to life than just a well-diversified portfolio.
This past weekend, our GTS Financial team was all about wellness. Grant completed his second Twin Cities Marathon. He's the one smiling and giving a thumbs up - 22 miles into the race! Stacey participated in a yoga, meditation, and journaling retreat along beautiful Lake Superior. Let's be honest - we all know Stacey picked the better option between running a marathon and a lakeside retreat. Heather completed her first-ever 10-mile race (her professional career was running shorter distances). Oh, by the way, she won her heat! Tyler also ran the 10 mile and improved his time over last year. He's aged like a fine wine.
Whether it's getting out and moving in whatever way you can or relaxing and reflecting, we encourage you to take steps toward your well-being. We are not able to control the markets, inflation, or other world events. However, we can focus on and control the actions we take to improve ourselves and the world around us.
Sneak in More Veggies with Mashed Cauliflower
Mashed potatoes are a classic side at any meal, but they can be calorie-dense and don’t provide as much nutritional benefit as other veggies.
If you want a tasty and easy way to incorporate more veggies into your meals this year, try this simple mashed cauliflower recipe:
Ingredients
- 1 head of cauliflower
- 1 tbsp olive oil
- 2 garlic cloves (minced)
- 1-2 tsp of finely chopped herbs such as thyme, rosemary, sage, chives, etc.
Instructions
- Trim the leaves off the cauliflower and cut the florets into smaller pieces. Rinse well.
- Steam the cauliflower florets in a pot with a steamer insert for about 6-8 minutes.
- While the cauliflower is steaming, heat the olive oil in a small pan over medium heat and add the minced garlic and cook until fragrant (about 30 seconds).
- Dump out the water from the pot and add the cauliflower, olive oil, garlic, and chopped herbs.
- Use a potato masher or food processor to mash the cauliflower and combine everything.
- Enjoy!
Never Underestimate Small Acts of Kindness
Sometimes it is the smallest things that mean the most, and yet most of us underestimate the power of reaching out to an old friend or giving away a cup of hot chocolate in a park.
Interesting new studies performed by Amit Kumar and Nicholas Epley out of the UT Austin and the University of Chicago explore how a little good goes an unexpectedly long way. What can we learn from these studies and how can we make the most positive impact on the people we interact with and beyond?
Read on to be inspired to become the 'small act of kindness fairy.' 😊
In the first study, researchers in Chicago gave people the opportunity to give away a cup of hot chocolate from a park kiosk to strangers and were asked to rank how this small gift would impact the moods of the recipient. On a scale of -5 to 5 (with -5 meaning much more negative than normal and 5 meaning much more positive than normal), the givers of the hot chocolate anticipated the recipients' moods might average at a 2.7.
The receivers of this unexpected warm drink reported themselves at a 3.5.4 The difference isn't extreme, but it does suggest that performers of this small act of kindness underestimated the significance of their act. And if your expectations are lower, it may even act as a barrier to engaging in prosocial actions more often in everyday life.
What researcher Amit Kumar found is that the performer of a small act of kindness will focus on the object or action they are providing to the recipient, and they fail to take into account the additional feelings of warmth the gesture itself will also conjure up. "Performers are not fully taking into account that their warm acts provide value from the act itself,” Kumar said. “The fact that you’re being nice to others adds a lot of value beyond whatever the thing is."4
These results alone should be an encouraging reminder that even things you may deem of little value can brighten a person's day well beyond your expectations. And it doesn't necessarily have to stop there!
In another study performed by Kumar and Epley in the lab, participants were either given a gift card from the lab, or they were gifted one by another participant. All recipients were asked to decide how they would like to divvy up their $100 gift between themselves and another unknown study participant. They found that participants who received the gift card through another participant's random act of kindness demonstrated more generosity. They tended to divide the $100 more evenly, giving away $48 on average in comparison to the control group at $41.4
Beyond the unexpected positive boost of warmth you can provide to another person through a small gift, Kumar concluded, "As it turns out generosity can actually be contagious." After a person is treated kindly, they are more likely to pay it forward and spread kindness.
And finally, in case we haven't convinced you, here is one more nugget of research that might help you step out of your comfort zone and connect with an old friend. In a study published in the Journal of Personality and Social Psychology, participants were directed to check in with others in small ways (via a text, email, or short phone call), and then asked both sides of the interaction to rate how meaningful it was. Unsurprisingly, the person doing the reaching out underestimated how much the interaction meant to the recipient. They also found that the more surprising or unexpected the check-in was, the more impact it had on the recipient. Those people you haven't spoken to in a while or with whom you are not as close to might be the ones who are most grateful to hear from you!5