Monthly Archives: July 2023

What we heard at the July Fed meeting

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The latest Federal Reserve meeting (July 26th) increased the interest rate another 25 basis points to 5.375%. We have another three upcoming meetings (September 20th, November 1st, and December 13th) left in 2023.

The current focus is now on fall corporate financial reports and the impact of existing debt payments on corporate profits to see if additional interest rate hikes are needed. GDP numbers out by July 27th showed an economy that is growing and consumers who are still spending (particularly in services rather than material goods) indicating that we are not in a recession. The CORE inflation measure (which strips out food and energy) used by the Federal Reserve in their evaluation actually dropped from 4.6 to 4.1% from May to June.

The new increase resulted in mortgage rates that though high (around 7%), compared to recent extremely low mortgage rates, are not historically the highest. It may be surprising to see that in areas with low housing supply (most people don’t want to sell a house with a mortgage below 3%) we are expecting house prices to actually increase 5%-10%. In areas with excess supply the story is different, and prices are dropping in the short-term. Similarly, the increased mortgage rates and abundant supply appear to be negatively impacting the commercial property market.

What does all this mean? Though your home and real estate may be impacted by this rate increase, we are not seeing a similar impact on your portfolio. If you feel strongly that commercial real estate will recover significantly this would be a time to invest in commercial REITs. Though we see promise in undervalued commercial real estate, we have more confidence that residential (not commercial) will outperform in the long-term despite additional potential interest rate increases.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

US credit downgrade by Fitch

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As you have no doubt heard, Fitch downgraded US credit to double A plus from triple A. Many reasons have been given for their decision though I think only one is at the core of the downgrade — “the increasing failure of politicians to tackle pressing reforms” and demonstrate a stable process for making long-term country-wide financial decisions. I can’t argue with that . . . the debt ceiling crisis demonstrated that our politicians are disinterested in an orderly financial decision process.

A bit of history to provide perspective on these credit rating companies:
Fitch Ratings Inc., Moody’s, and Standard & Poor’s are the “Big Three” credit rating agencies nationally recognized to evaluate financial products/companies by the Securities and Exchange Commission (SEC) since 1975.

In 2011, the S&P Global Rating was the first to drop US credit to double A. The market mostly ignored this downgrade since this is the same credit rating company that continued to sustain a AAA rating for Lehmann Brothers even as LB filed for bankruptcy. Making matters worse, when the dust settled, this credit agency was found to have benefited from providing high credit ratings to packaged subprime mortgages (i.e., those with no-job, no income) that were then sold to unwary investors.

Moody’s is the remaining credit agency that still believes that the US will pay off its bills and deserves the AAA rating.

Though the remaining countries with triple A credit ratings from all three agencies have stable financial process around debt management many of them have high national debt levels. The countries are Germany, Denmark, Netherlands, Sweden, Norway, Luxemburg, Singapore, and Australia.

What does this downgrade mean? For now, not too much since the US dollar remains the go-to currency and US Treasuries are still considered the risk-free asset to have, particularly during a crisis. Unfortunately, this downgrade does mean that the debt service payments will increase and erode faith in the US dollar.

To resolve this issue, the US needs to deal with long-term fiscal issues in an organized and responsible manner.

What does this mean for your portfolio? Not much in the short-term. It does though remind us to maintain a globally allocated portfolio.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

What to expect from the next Fed meeting

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The Federal Reserve System’s US Federal Open Market Committee (FOMC) meets 8 times each year to decide on the short-term interest rate – the next meeting is July 26th. We’ve seen market volatility prior to and following each of these rate increases. The table below shows the last ten increases out of the last twelve meetings. Most pundits expect a small rate increase either in July or/and September and we expect market volatility.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Property Insurance Changes

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Insurance companies are pulling out of property insurance in locations that are showing signs of high claims/costs. In some areas of California, there is rising concern among property owners regarding homeowner’s or rental property insurance now that two of the largest property insurance companies (State Farm and Allstate) announced that they are going to stop selling new policies and are canceling existing policies in disaster-prone areas.

To be fair, insurance companies are facing severe and growing challenges from the unpredictability, frequency, and severity of Climate Change. In addition, in many areas, they are also contending with the very high cost of construction.

What should you do if you suspect an insurance policy cancelation?

  1. Read your mail since insurance carriers are required to follow rules that benefit the consumer before they can cancel a policy. They may provide tools or alternatives, but they usually have a deadline.
  2. Make preventative repairs/upgrades and document them for your insurer.
  3. At the next opportunity consider increasing your deductible since you don’t want to make any small claims.

What should you do if your coverage is denied or dropped?

  1. Read carefully and follow instructions in their correspondence.
  2. You should first look for Admitted Carriers (e.g. State Farm, Allstate, AAA, USAA, Farmers) to obtain new coverage because they are regulated by the Department of Insurance (DOI) which controls costs and enforces regulations.
  3. If there is no Admitted Carrier willing to cover your property, then look for Non-Admitted Carriers. These are less regulated, more costly but can provide essential property insurance. https://www.insurance.ca.gov/01-consumers/120-company/07-lasli/
  4. If neither of these options are available for your property in California, you can pursue a policy under the California FAIR Plan which offers basic fire protection without liability or theft coverage. It will cost more than the traditional policy. In addition, you should consider a supplementary policy to cover what is excluded in the FAIR plan. Let us know if you are in other states so we can let you know of an equivalent resource.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com