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Buckle Up                                                                                                                                Join our Quarterly Newsletter            July 2022                                                                                             

Mark R. Hoffman

CEO, Principal


The first half of 2022 was a brutal one for investors.  In the first six months of the year, the S&P 500 index was down 20.6%.  The Nasdaq was down 29.4%.  “Diversifying” bonds?  The U.S. Aggregate Bond index was down 10%.  All-in-all, it was the worst six month start to a year since 1970.  Ugh.  So, as an investor, you have to ask, “Is relief in sight?”  To that, we would answer, “Maybe, but it probably won’t be immediate.” 

 

Inflation continues to be a significant problem and until that is under control, our odds of escaping without a recession aren’t good.  We looked at average U.S. household data and year-over-year increases in several components of income and cost.  The data paints an alarming picture.  [Note: the data presented below are the averages for U.S. households.  Your results will vary.]

 

First the good news: average salaries in the U.S. are up 3.4% year-over-year.  At an average salary of $52,000, households are earning $1,800/year or $150/month more than they were at the same point last year.  With an average tax rate of 22.4%, households were netting an additional $1,400/year or $115/month that they could spend (or save?) on whatever they choose.

 

But rising interest rates and soaring inflation are eating away all of those income gains and then some.  Here are some of the components:

  • If you rent, average rent in the U.S. has risen in one year from $1,750/month to $2,000/month. That’s an increase of 14% in the last year.
  • Because of rising interest rates, the cost of home ownership has gone up even more. The median sales price for a home is now $400,000.  A year ago, a 30-year fixed mortgage interest rate was 3.5%.  Today it’s 6%.  Assuming you put 20% down on the home, instead of having a monthly mortgage of $1,450 a year ago, it’s now $1,937.  That’s 33% higher in 12 months and costs you another $467/month. 
  • Energy prices are up 35% year-over-year. What does that mean for the average household? 
    • Electricity prices are up 12%. What was an average in the U.S. of $120/month is now $134/month.
    • Natural gas prices are up 30% costing the average household an additional $15/month.
    • Gas prices are up a whopping 50% (that’s not a typo) costing each household roughly $50/month more to fill up their cars.
  • Food prices are up 11% year-over-year. With an average monthly food bill of $412, households now are paying $45/month more to put food on the table.
  • I’ll stop there without getting to credit cards, healthcare, cost of car ownership, etc. It’s depressing enough already.

 

Add all of that up and what do you have?  The average household that is now netting $115/month more income has $374/month higher costs if you are renting and $591/month higher costs if you are buying a home.  And that is just for the categories of housing, energy and food.  One more data point – sadly, 60% of American households live paycheck-to-paycheck.  Something simply has to give or we are headed straight into a bad place. 

 

Can this be solved?  Yes, but not immediately.  Unfortunately, higher energy costs are going to be with us for a while.  Already tight supplies have been worsened by the Russia/Ukraine war and near-term relief doesn’t seem to be in the cards.  The Federal Reserve’s answer to quelling inflation is raising interest rates.  That should work, but in the near-term, it makes some of the issues above worse, not better (see mortgage rates). 

 

So in the face of all of this, what is an investor to do?  1) Keep your eye on the long-term.  Markets will rebound, but they may take some time.  2) If you have moved to a less risky portfolio (e.g., moving to more cash), stay patient.  There will be great buying opportunities over the coming months.  3) If you have truly diversified, stay that way.  If you have not truly diversified, you should seriously consider it.  One example: our friends at Infinity Capital Partners have a hedge fund-of-funds that is up over 5% year-to-date – a godsend for our clients that own it.  If you don’t own it or something like it as an anchor in your portfolio, it may be worth some serious consideration. 

 

We will all get through this.  But there may be more pain in the short term. 

 


Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.