FORECASTS & TRENDS E-LETTER
By Phil Denney
April 23, 2024

IN THIS ISSUE:

1.  Insolvency of Social Security?

2.  Treasury Yields Signal Confidence – and Debt

3.  Planning for the Next Stock Market Correction

2024 is a presidential election year, which means some very familiar economic topics are forefront in the news. Three big topics usually debated are inflation, rising Federal debt and the insolvency of Social Security. The Social Security Administration has estimated that the Social Security Trust Fund will be depleted in 2033. Does this mean Social Security will be bankrupt or in default?

We’ll take a look at that and what rising U.S. Treasury yields may be telling us in that regard. Finally, I’ll share some advice on how to plan for the next stock market correction. We may be headed toward one in the near future, so it’s best to plan for it now.

Insolvency of Social Security?

An article by John Tamny titled Neither Adults Nor Young Adults Need Fear Social Security’s Insolvency tells us why we should have no fear. Tamny writes, “Critics of Social Security, and there’s much to criticize, use the lack of a ‘lock box’ or actual ‘trust fund’ to make their emotional cases for the program’s looming insolvency, reduced benefits, or both. Actually, the total lack of a ‘lock box’ is the surest sign that future retirees needn’t fear reduced benefits or insolvency.”

As I hope you know, there is no lock box or trust fund for Social Security. Does anyone seriously think the government separated the money it has taxed us for Social Security into actual accounts? Not! The point is that future Social Security benefits will not be paid by simply using past or existing Social Security taxes; it will be paid for using general revenues.

Treasury Yields Signal Confidence – and Debt

It is interesting to note that the Social Security Trust Fund is required by law to invest only in U.S. Treasury bonds, which are bonds backed by the full faith and credit of the U.S. government. When the Fund needs to pay benefits that exceed income from payroll taxes, it redeems some of these bonds. When the Trust Fund reaches the point of depletion – estimated to be sometime in 2033 – the remaining liability will be covered by the Federal budget.

But think about how high Treasury rates are now. The 10-Year Treasury note currently yields about 4.6% and the 30-Year Treasury about 4.7%. Tamny again writes, “The simple truth is that Treasuries are the most owned assets in the world, and because they’re the most owned, Treasury markets are the deepest and most knowledge-pregnant in the world.”

The yields on Treasuries don’t signal reduced tax revenue collection in the future. Rather they signal even more Treasuries will be available in the future to fund government spending, including for Social Security. Of course, knowing there will be an even greater supply of Treasuries down the road is sad news. That means the national debt will continue to grow, regardless of who gets elected in November.

Yes, we will keep hearing about the looming “insolvency” of Social Security.  It is a popular notion among the talking heads on financial networks and by politicians pandering to portions of the electorate. Yet the markets know that without regard to the good or bad of Social Security, it will be funded in perpetuity.

I am as concerned as you are about the size of our national debt but remember that the U.S. Treasury market plays a critical role in the global economy. It is currently about $25 trillion in size. No other country even comes close to the total debt the U.S. holds. (Second is the United Kingdom with about $9 trillion in debt.)

So as Bobby McFerrin sings, “Don’t worry, be happy!” It is reasonable to believe that Social Security will be funded in perpetuity. Your Congressman’s job depends on it. Make sure he or she knows that.

Planning for the Next Stock Market Correction

The stock market has been a means for many investors to generate wealth and achieve long-term financial goals. But while indexes like the S&P 500 and Nasdaq 100 have comfortably outpaced inflation and rewarded investors over multiple decades, they have also weathered multiple stock market corrections.

A correction is commonly considered a broad market decline of at least 10% but less than 20%. As of this writing the indexes are down about 6%.

Most investors don’t like to see their portfolios drop by a correction-sized amount of 10%, but this is part of investing in the stock markets. While corrections are never pleasant, the key is to focus on how your portfolio is built to achieve your long-term financial goals and handle the risks in the financial markets along the way.

Marc Guberti at U.S. News & World Report wrote a good article on weathering a stock market correction. Below are a few key points.

Corrections are healthy. Stock market corrections keep investors in check. A lack of corrections can leave the stock market vulnerable to a crash because corrections pull back valuations to more reasonable levels. A lack of corrections can also create a false sense of invincibility by investors.

Most corrections quickly reach their bottom. It is true that all bear markets start out as corrections. This realization can prompt some investors to panic, but corrections are far more frequent than crashes. Most corrections reach their bottom after a few months before the stock market rebounds.

The stock market has a history of recovering for long-term investors. However, long-term for someone in their 20’s is probably different than someone in their 60’s or 70’s. The question is, will you live long enough for your portfolio to recover?

Guberti writes, “The pandemic quickly turned from a correction to a crash as investors came to grips with how lockdowns would affect global commerce. Then when people settled down and realized the end wasn’t near, the market in 2020 recovered dramatically.”

Of course, if that same scenario happened again, there is no guarantee we would see the same result. But the pandemic was a good test for many investors on the level of risk they would be willing to take or shouldn’t tolerate.

So how do you plan for a stock market correction? You should first assess your risk tolerance and when you will need your money. If you are approaching retirement or are in retirement, you may want less volatility in your portfolio. Younger investors have more time to ride out market corrections and volatility. While age is a factor, investors must consider their patience and ability to stay even keeled during a market setback. Keep a cash reserve to help you ride out the storm.

Then second, look for investments that did not have a high correlation to the stock or bond markets in 2008, 2020 and 2022 when markets plunged. Look at how much they were down (drawdown) and then how long it took them to recover to their previous high. In each of these years both stocks and bonds went down together. There were few places to hide.

Third, don’t just hope it all works out in the end. Hope is not a strategy.

Words of wisdom: Plan carefully and you will have plenty; if you act too quickly, you will never have enough. The wise man saves for the future, but the foolish man spends whatever he gets.

Thanks for reading,

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.