A Downgrade and The Old Man and the Sea

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August 6, 2023

CUSTODIAL SWITCH: August is generally the slowest month at Stonecrop Wealth Advisors. But not this August! As a Registered Investment Advisor (RIA), we need a financial custodian to hold all the assets we manage. For over a decade we have used TD Ameritrade. For many years, we were quite happy with TD Ameritrade. Due to a merger agreement with Schwab, TD Ameritrade will no longer exist in about a month. Typically RIAs avoid a custodial change if at all possible due to the disruption and paperwork. Since all our clients were going to go through a switch anyway (from TD to Schwab), we decided to take a look and determine the best custodian for us to work with going forward, and after a long process, we chose Fidelity. And so we are right in the middle of moving each and every client over to Fidelity. It is a daunting task, and my colleagues are working incredibly hard to get this accomplished. Fidelity has been extremely responsive and helpful as well. We are excited about this new relationship!

…AND SPEAKING OF EXCITEMENT: I recently told you about our new team member, Charles Blachford. In short order, he prepared for and took the Series 65 examination, and as you can see below: He passed! This is also called the Uniform Investment Adviser Law Exam. It is designed to test an individual’s knowledge and ability to advise clients in the area of investing and general financial concepts. This is a required qualification for Charles to interact and advise current and potential clients. I have known Charles for several years, and I am not at all surprised he passed it quickly and on his first try. Well done Charles!

OUCH!: Fitch is one of the “big three” credit rating agencies in the U.S. (the others are Moody’s and Standard & Poor’s). Last week, Fitch lowered the U.S. credit rating from AAA to AA+. They cited “expected fiscal deterioration over the next three years.” The rising government debt and rising interest costs on that debt (nearly $1 trillion interest expense likely this year) contributed to this downgrade.

THE LABOR MARKET IS COOLING: In July, the United States economy added 187,000 net new jobs, one month after a nearly identical number. It seems like the economy is slowly cooling off, which will be music to the ears for the Fed. 187,000 is a solid increase, but significantly less than a year ago when the average month was about 400,000. The unemployment rate ticked down from 3.6% to 3.5%. Average hourly earnings rose 4.4% from a year earlier.

STOCKS FALL ON U.S. DEBT DOWNGRADE: The markets have had a good year so far, and a small pullback can be expected. Markets rarely climb without hiccups along the way. But this hiccup had a sound fundamental reason. The U.S. credit downgrade ignited a selloff in stock and bonds. We all remain fixated on whether a recession is looming, with more and more prognosticators saying ‘no,’ but the credit rating, and the reasons behind it, wake investors up to longer term challenges facing the U.S. economy and what rising national debt, especially in a higher interest rate environment, will mean to growth prospects. This debt issue tends to get forgotten pretty quickly, but with another debt ceiling fight looming in October or November, it is likely to be an issue that stays on investors’ minds.

LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices.

MORE THAN 1%: Last Wednesday, the S&P 500 fell by 1.4%. that was the first time it had dropped 1% or more in 47 trading days. Tech stocks dropped 2.5% that day leading the way in ending the streak.

BANK OF ENGLAND FOLLOWS THE TREND: The Bank of England raised its key interest rate from 5.0% to 5.25%, the 14th consecutive rate increase. The bank announced it will continue to raise rates if necessary to cool inflation. In June, the U.K.’s annual inflation rate came in at 7.9%, significantly higher than the U.S. and the eurozone.

CHINA SLOWING: China is facing several challenges to its economic health. The youth unemployment rate in China is 21%. Prices are going down at a rate that creates a risk of a deflation cycle. The real estate market is slowing considerably (currently running at 77% of 2019 levels). The overall Chinese economy barely grew in the second quarter of this year. July numbers are not encouraging. China’s purchasing managers index contracted for the fourth straight month. The services sector of the economy fell to its lowest level of the year. A gauge of smaller factory activity showed a decrease in activity. It does not look like we can count on China to fuel world economic growth in the near future, particularly in Europe.

WHAT DO YOU READ ON VACATION?: I read two books during my beach vacation. One was a quick re-read of The Old Man and the Sea, by Ernest Hemingway. The theme of having purpose in life was central in that simple story. The other book was one sent to me by clients who know that I enjoy running. It is called Born to Run by Christopher McDougall. It is a fascinating story about a bunch of ultra distance runners, and in particular the Tarahumara people of a remote, mountainous area of Mexico. For a casual runner like me, who would like to be better, it is useful because there is a lot of running and fitness and general health science woven into the engaging story.

AN EXERCISE: Speaking of reading. I was asked a question not long ago, and I have been re-asking it to others. I find that it provokes a lot of thought. Most people have a partial answer, but not a complete one when first asked. The question, “What are the five books that have been the most meaningful in your life?” I’d love to hear yours. So far, I have only been able to come up with four. I’m trying to determine my fifth.

Have a great week!

Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.

Douglas R. MacGray, J.D., C.F.P. ®
Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax
(610) 628 4545

“To achieve great things, two things are needed; a plan, and not quite enough time.” Leonard Bernstein

“Surely everyone goes around like a mere phantom; in vain they rush about, heaping up wealth without knowing whose it will finally be.” Psalm 39:6 (NIV)

THE LABOR MARKET IS COOLING: https://www.bls.gov/news.release/empsit.nr0.htm
MORE THAN 1%: https://grits-newsletter-78396b.beehiiv.com/p/us-oil-inventories-drop-record
OUCH!: https://grits-newsletter-78396b.beehiiv.com/p/us-gets-taken-notch
BANK OF ENGLAND FOLLOWS THE TREND: https://www.wsj.com/articles/bank-of-england-rate-decision-august-d683d0a?mod=economy_lead_pos4
CHINA SLOWING: https://www.wsj.com/articles/chinas-economy-stutters-forward-as-growth-concerns-linger-1be8acb2?mod=economy_more_p

(c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.




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    Doug MacGray

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    August 7, 2023


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