Be Patient While the Economy Adjusts

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I’m Paul Winkler, discussing the world of money and investing and going through the news of the day, as well as your questions if they come in. If you have a question or a topic you’d like to hear about, you can run those things by me. Just go to paulwinkler.com/question.

Energy Prices and Stock Prices

There are a couple of questions that actually did come in, and I will be covering some of those as we go through the news of the week as well. You’ve probably noticed the news about oil prices. It’s interesting because we’ve talked a little bit about how energy prices in some cases have gone up. Of course, you’ve been seeing energy prices at the pump coming down.

The Wall Street Journal actually covered that this week, talking about how America has lost its oil buffer.The U.S. has been drawing from the strategic petroleum reserve at a rapid pace this year. In fact, the U.S. Energy Information Administration has said that the strategic petroleum reserve declined by nearly seven million barrels, leaving it at roughly 427 million barrels. So, there’s a lot more out there, but they’ve been drawing it down to some extent.

Energy department on Monday said that it released nearly or roughly 155 million barrels of crude oil since President Biden authorized a draw of up to 180 million barrels, in order to get the price down. I’m sure that there are people out there that will conjecture as to why, but I won’t get into that.

This is something that has been happening and it’s just one of those things that you go, “Okay, so what is affecting corporate prices?” Merely the cost of running companies. That’s going to be one big thing, really, and that is energy costs.

There are a lot of factors you could look at. What drives stock prices is really not only purchasing, it’s also prices from a standpoint of input costs, digital chips, and those types of things.

Corporate supply chain issues and inflation have had an impact on stock prices.

Companies often know that what we do as investors is own stocks. Why? To protect ourselves against inflation.

Well, what’s inflation? Inflation is when prices go up, so we own equities for that reason. I often point out to people that just because you have inflation protection in equities, that doesn’t mean when inflation occurs stocks will go up.

A lot of times they’ll go down in the short run. For many years, I’ve said that simply because if you have inflation, people don’t want to raise their costs right away because they don’t know necessarily if other competitors are going to do the same.

Inflation Risks

So if they do raise their costs, or raise what they charge for what they sell, and their competitors don’t, then they can lose market share and that can be a big problem.That has been one of the things we’ve seen.

Companies take a little bit of a hit on profit margin in the short run for that. Then you can also look at risks in the economy rising as you have more inflation. How will companies actually readjust to make sure that they don’t lose in the long run? They’re going to figure out ways and it may be laying people off.

Companies will figure out how to manage inflation so that they don’t lose in the long run. You can count on that. 

It may be a lot of things that are distasteful to politicians. So, it’s interesting how, politically, these events can actually affect what companies do as far as maneuvering. They’re going to maneuver regardless of what the political fallout is.

Still, politicians will do what they can to try to lessen the impact on their reelection bids. And that’ll happen, depending on the state you’re in, no matter who’s in power.

Mortgage Rates and the Housing Market

The other thing that’s interesting this week I think, is looking at mortgage rates and how this is affecting home sellers. There has been an increase in adjustable mortgages.

So as a result, people adjusted their own behavior, in order to still be able to buy homes. Well, what’s been happening is in the short run there’s some of this movement toward adjustable rate mortgages, where you have a much, much lower initial interest rate and it can increase as time goes on.

Doing that gives the lender some flexibility as to what to charge in the future. But what’s going on right now is that there are homeowners balking at the thought of selling their homes.

The housing inventory has risen from record lows earlier this year, but what’s happening is homes are sitting on the market longer. And that’s one of the things that people are sitting there going, “Well, you might have to actually drop your price on the home.”

This is not only because people aren’t necessarily buying as fast, but they’re not selling their old home at all. So your demand for moving from one place to another is actually much more limited.

The number of newly listed homes in the four weeks ending September 11th fell 19% year after year. People are looking at the mortgage rates and it’s not terribly palatable to jump from a 2% rate to a 6% rate. Which leaves people sitting right where they are.

So what will people do? Will they start to add on to existing homes? Will they make their existing home someplace that they might want to stay a little bit longer?

This is being called the golden handcuffs of mortgage rates. That hearkens back to when different companies had different programs for keeping their executives in place.

Home sellers are stuck in what could be called the golden handcuffs of mortgage rates. 

They would set up deferred comp programs and investment programs so that if the executive left, they would be hit with a penalty for leaving or lose the money all together.

And that’s what’s happening. People are stuck in place. If we look back to the 1980s, it took a while before people warmed up to other ways of doing things.

Investment Strategies

It is interesting to see how this is impacting the housing market. This is something that I’ve said in videos over the years. People talk about how to invest and what to do exactly, and some people don’t trust the markets as far as they could throw them.

When traveling, I have asked wealthy people what their investment strategies are, just out of curiosity. A lot of them don’t do anything other than real estate.

Now, there are real risks that people don’t necessarily recognize in that strategy. For example, people can leave, they can move, they can change their location. Companies can move out of an area, which can reduce the demand for property in those areas.

Some don’t understand how interest rate increases actually affect property values. But now, I think people are getting it because all of a sudden no one wants to move from low interest rates to high interest rate mortgages.

What this really does is reduce the demand for real estate for purchase, and when you reduce the demand, you reduce prices and properties sit on the market for longer. So, that’s what we’re seeing right now.

It’s just interesting that people are getting the idea that maybe real estate goes through longer cycles a lot of times than the stock market does. As far as investing, I always tell people that real estate is just another asset category, it’s another asset class.

When I own stocks, I’ve got lots of exposure to real estate, but I don’t want to concentrate on any one asset category. For 10 years, tech stocks did better than anything else in the 1990s, but it didn’t mean I wanted to focus all of my efforts there.

For a decade in the 1970s, international stocks did better than anything else. There are periods of time when U.S. stocks do better than anything else, but you don’t get hooked on any one asset category because when things change, they change fairly rapidly.

When investing, you won’t get a big warning sign that things are about to change.

One of the couples interviewed regarding this article said they felt locked in their current home due to rising interest rates.About a third of all homeowners feel this way.

Don’t Sit on the Sidelines of Investing

Among 197 homeowners who said they were saving to buy a home, only 15% said that they would be willing to take on a mortgage rate of 6% or higher. Only 15%, that’s a pretty small percentage.

I am reminded of stock market investing. There are a lot of times when potential investors will sit on the sideline and think that when things start to look better, that’s when they’ll invest. Then all of a sudden the market goes up so rapidly they wish they hadn’t sat around waiting.

That’s the problem with market timing. You have to be right twice. You have to be right when you get in, and you have to be right when you get out.

Be wary of market timing because it’s a risky and, more often than not, futile business. 

Some people will get out of the market and pat themselves on the back because they think they did a really good job timing it. Then all of a sudden, the market goes back up and they’ve missed it entirely.

There are stories, many stories, of people who timed the market downturns well, but then didn’t get back in the market in time. It’s a challenge and that’s why I don’t even try to do it. It’s just a futile, risky challenge, in my humble opinion.

Want to talk with us directly?

Schedule a call here.

*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.