What We're Thinking: Crisis and Opportunity

You've heard the news. You cannot have missed it. None of it seems good. Yet, serious analysts and asset managers are as puzzled as the rest of us. That said, last week, Michael Cembalest at JP Morgan wrote, “Here’s the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied.” And of course, there's Einstein. He seemed to have a pretty good grasp of things.

With that, we fall back on classic, time-tested, simple observations for framing our personal finances. Simple beats complex (Occam's Razor). Use these to frame your own outlook. They are general statements and do not constitute specific, individual advice. Reach out to us if you'd like to discuss your household needs, goals, and aspirations. 

1.  Markets continuously match Expectations with Reality, for as far as its eye can see. This is often called "pricing in." When new information arrives, it's "priced in." Immediately. Thousands of AI-driven tools make it happen. "Pricing in" is what's happening now. Remember this when you might start thinking you know better than the market.

2. Volatility is not Risk. Risk is the permanent loss of capital, mainly through inflation and deflation. Volatility is fluctuation or what William Bernstein calls "shallow risk." Volatility is what sows the seeds for future results. Current levels of volatility have only occurred five other times since 1990 (CBOE Volatility Index at St. Louis Federal Reserve). All of them were Opportunities to sow the seeds for future gains.

3.  Reversion to the mean was originally a biologic concept (Francis Galton). It's also become a law of economics and markets. Things go from one extreme to another and always revert toward the mean. See our Considerations post of February 13, 2023, here.

4. Two emotions drive investor sentiment: Fear and Greed.

The noisy looking chart below shows the entire history of the CNN Fear & Greed Index through 2024. (We created it via a Perplexity AI query.)

The Index currently sits at 4, on a scale 0-100. It has been under 10 only seven other times in its 14 year history. Each time was a precursor to a significant market advance.  

Cue Warren Buffett: Buy when others are fearful. Sell when others are greedy.

 

5. Bonds and inflation don't play well together. We saw that in 2021-22. Right now, there's a flee to the perceived safety of bonds. Except for short-term holdings, we're not fans. Our 5-year rule applies. Any money that you might use in the next five years belongs in a cash or fixed income place. 

6.  Sharp Down markets are often followed by sharp Up markets. Missing those sharp Up markets will permanently reduce your long-term investment results. (JP Morgan)

7. Down markets do not cause recessions, but all recessions are preceded by down markets. See our Considerations post of March 12, 2025, here.

8. Down markets are opportunities to welcome the Gift Horse. See our Considerations post of February 27, 2020, here.  

This is where we're at folks. As noted above, we're here to have the necessary conversations you might need right now.

 

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.

What We're Thinking: Considerations is Back

  

Yes. After some time in the woods of Healthy, Wealthy, and Wise, we're back to what we know best and where we believe we can add value. Not that health and wisdom don't deserve attention, but they deserve more than we can give them.

We're also reminded of the phrase "stick to your knitting." Focus on what you know and don't get distracted by wandering from your area of expertise. That's from the 17th-century Dutch proverb, "Shoemaker, stick to your last." These days the term is used to encourage people to stick with their core strengths rather than delve into areas where they might lack expertise.

So, back to our core strengths.

We've been intentionally quiet for a while as the election results unfold. From an economic and investment standpoint, the likelihood of a recession seems to be building. 

The nine-point template below is offered as a model for this part of an economic cycle. The points are roughly sequential. Yet there are always overlaps and some things are more dramatically presented by politicians and in the media than they need to be. 

Also- and this is essential- avoid conflating opinions (which are unproven beliefs) with facts (which are verified knowns). Especially don't conflate strongly held beliefs (like democracy is coming to an end) with what's known (institutions are amazingly resilient). Doing so is a recipe for frustration, poor decisions, and disappointing results.

We'll start with our basic opinion (belief). It's that the U.S. is in the late stage of an economic expansion. That would have been true even if Harris had been elected. But it won't become a fact (known) until we all see it in the rear view mirror. This list builds on that opinion.

1. Asset Values Decline. There are three major assets- real estate, stocks, and bonds.* This point is first on the list because markets "price in" future expectations every day. Markets are forward looking. They tend to ignore the daily news unless it changes future expectations. That said, not all declines are forebearers of recessions, but all recessions have been preceded by asset declines.

2. Demand for Goods and Services Slows Down. For whatever reasons, consumers pare back their spending. This is important because consumers create about 70% of economic value. Major companies like Wal-Mart, Target, and Delta Airlines have recently guided analysts lower regarding their year-ahead expectations. That handwriting on the wall is getting priced in.

3. Unemployment Rises. This happens when businesses start guarding their capital and income statements more closely. One way to control costs is to pause promotions, pause hiring, and maybe even lay off workers.

4. Corporate Profits Weaken. Companies earn less due to weaker demand, leading to more aggressive cost-cutting measures. But they can't save their way to prosperity.

5. GDP Declines. With some considerable lag time, the effects of 2, 3, and 4, above, show up as a decline in Gross Domestic Product. GDP is the value of all goods and services sold. Despite being "priced in", media treatment tends to underscore the pain.

6. Interest Rates Fall. Think of interest as the cost of money. When businesses contract, there is less demand for money, hence a lower cost. This also means bond values increase. Interest rates and bond prices are the inverse of each other. 

7. Asset Values Start to Recover. This seems to happen for no good reason at all. Who wants to buy stocks when companies are struggling? There's a saying that "markets climb a wall of worry." Yes they do, like during the early days of Covid when recession was setting in. A recovery was being "priced in." 

8. Government Intervenes. Policymakers introduce stimulus measures. This is generally done by the Federal Reserve and/or Congressional action. It usually involves some combination of tax reductions, direct payments, and increased government spending.

Recessions can vary in severity and length, but they are a natural part of the economic cycle. The good news is that every recession has been followed by a recovery.

✔ What might all this mean to you? What's actionable on your part?

If you're currently employed...

...be thinking now of what an income interruption would mean to you. It's quite risky to wait until a job loss actually occurs to take action. Have enough cash on hand to handle 12 months of basic spending. That cash belongs in a savings account, money market, or bond fund. It does not belong in the stock market!

...continue to fund your retirement plan. Market declines are a gift from the market goddess that allow you to buy assets on sale.

If you're no longer working for income and living off pensions and portfolio assets...

...pensions will continue unabated. There's nothing to do.

...portfolio assets will move in line with overall market trends and the portfolio's asset allocation.  Avoid the temptation to "get conservative." In fact, it's often a good time to get more aggressive, to "buy low."

None of this constitutes individual personal finance advice. Reach out to one of us to discuss your personal situation.

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315 

        Evidence-based. Rules-driven. Policy-focused.

Note:
* In the U.S., real estate accounts for 48% of all assets, stocks are 36%, and bonds are 16%.

Healthy, Wealthy, and Wise #3

Healthy

The Winter Arc

Now that the holiday decorations are put away, the New Year's resolutions loom. But wait, there are so many distractions and other things that need attention. Getting to the gym, shaping up, and dropping a few pounds is probably already fading as something doable. But here’s a more realistic approach. It’s called the Winter Arc.

There are no stringent rules, no mandates, no diets to follow, or other boxes to check. Instead, it’s a set of guidelines that are accessible and flexible. Start small. Be realistic. Track progress. It’s not too late. Here’s how to do it.

👉Start small. Focus on behaviors, not outcomes.

We have more control over our day-to-day choices and habits than in trying to achieve big hairy goals. Adding more daily steps- a behavior- is easier than thinking of losing 15 pounds in a month. This is a mindset shift. It’s small. You'll make progress. And burnout is less likely.

👉Be realistic. Avoid strict guidelines and aggressive fitness challenges. That’s how to fail at fitness.

If you want to exercise five out of every seven days, it really doesn’t matter which five days you do it. The goal is five days.

Switch things up. Do a walk one day and maybe strength training another day. It’s okay to adapt to whatever else is going on in life. Being able to adjust your schedule and give yourself reasonable slack actually helps stay on track.

👉Track progress. This will help you stay accountable to the only person who matters: you.

It takes about six months (not 30 days) for a new habit to form. So, the Winter Arc is just the start of building healthy habits for the long haul. Small changes applied over time compound, just like an investment account. Just keep track of what you’re doing. You’ll see how it adds up.

Wealthy

The recently signed Social Security Fairness Act (H.R. 82) repeals the WEP (Windfall Elimination Provision) and GPO (Government Pension Offset) provisions in Social Security. When implemented, the Act will end the reduction of Social Security benefits for public employees who may have worked in the private sector and paid into Social Security.

The Social Security Administration is charged with implementation and will provide guidance and information to affected individuals. H.R. 82 does not impact existing CAPERS, CASTRS, or private pension benefits.

The repeal is retroactive for one year and applies to benefits payable after December 2023.

If you believe you might qualify, it's important to set up an account 'my Social Security'. Here's the link: https://www.ssa.gov/myaccount/. This will make it easier for Social Security to contact you. As might be expected, scams will unfold around this. Know that Social Security will not phone you, send text messages, or email.

Wise

Whether it's a New Year’s resolution or other life-changing goal, friends and family like to help. However well-meaning, they can unintentionally hinder someone’s efforts to make changes. Psychologists say a person’s ability to change depends on motivation, and motivation depends on three things: confidence that we can make the change, our sense of autonomy and agency, and feeling accepted, valued, and supported by others. 

 

We can help others on their journey by expressing the belief they are fully capable, expressing confidence in their choice, and fostering relatedness in offering to be their partner. Other ways include promoting their self-awareness without pestering with questions, offering compassion, not offering solutions without being asked, and to “cheer-lead" your heart out when they have success.

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315 

 

        Evidence-based. Rules-driven. Policy-focused.

Healthy, Wealthy, and Wise #2

 

 

Health

One of the keys to long-term success is to avoid mistakes, unforced errors. 

This summary traces the efforts of David Sinclair of Harvard, to slow or reverse aging and other age-related realities. He says, "Aging can be slowed or reversed, and we are about to figure out how." 

According to a Wall Street Journal article, he has founded the following companies. None of them have gained traction.

• Animal Biosciences. Reversed aging in dogs.
• Calico Life Sciences. Launched by Google.
• New Limit. A cell re-programming company.
• Altos Labs. Cell rejuvenation.
• Sirtris Pharmaceuticals. Red wine and resveratrol.
• OvaScience. Helping "older" women become pregnant.
• CohBar. Treatments for obesity and fatty liver disease.
• Life Biosciences. Genetic reprogramming for vision loss.
• Metro International Biotech. Seeking to develop a formulation to treat age-related conditions such as Alzheimer’s disease. Being marketed to consumers as a longevity-promoting supplement.
• Fully Aligned. A consumer wellness company featuring Serena Poon, celebrity chef.
• Tally Health. Developing a cheek-swab test to tell people their biological age.

Sinclair admits that “Developing medicines that safely and effectively target aging is a difficult endeavor that has turned out to take longer than I expected.”

The Food and Drug Administration, where approval for longevity drugs is administered, doesn’t consider aging a disease.

The holy grail of longer lives continues to be elusive. Don't make an unforced error in its pursuit.

Wealth 

Here are two wildly diverse strategies for investing at the edges.

At the hard money edge is owning a core of U.S. Treasury securities. They pay reasonable rates and are fully guaranteed by the full faith and credit of the United States government. 

At the easy money edge is to own some kind of cryptocurrency like Bitcoin. Despite friendlier tones being expressed by the incoming administration, our view remains that cryptocurrencies don't meet the standards of an investment. No earnings, no cash flow, no dividends, no interest, no use case.They are a pure speculation.  

At the end of the day, the lure of "Easy Money" requires parting with your hard earned cash to earn even more. "Hard Money" takes years to build and doesn't depend on a gimmick, popularity, or single investment. We're sticking with Hard Money. You're welcome. 

💥IMPORTANT! This is not specific investment advice! If either of these possibilities appeal to you, please contact us before you do anything. There are important details that must be covered.

 

Wisdom

         Willem Arondéus, "December" (ca. 1929), Rijksmuseum

             The caption reads, "The Year Reclines to Rest in a Cloak of Cold."

In Nature, this is the season of darkness, rest, silence. Silent Night, Holy Night. Visions of sugar plums. This poem seems to strike the right notes.

Let the eyes sparkle with joy,
The mind be filled with possibility,
The heart strong with courage
And your only boundary is joy.

Go. Believe.

You can do anything. It is all possible.
Allow yourself to breath-in the openness of possibility.
Release all barriers of the mind.
Let the soul rise with love and passion.
Allow yourself to dream.
You're too precious to not.

Erica Valentine, Just Breathe

Blessings for this Holiday Season and Best Wishes for a Fulfilling New Year.

James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315

Evidence-based. Rules-driven. Policy-focused.