Uncertainty has risen!
Happy New Year! We took a couple weeks break from a very busy year to get ready for this year that will be very busy as well. It is important to recharge, renew, and be intentional about the other parts of our lives other than work because if we don’t take care of ourselves, who is going to take care of us? As far as markets are concerned 2024 was another 20% return for equity markets for the 2nd year in a row while interest rates declined in the beginning of the year with the consensus expectation of the Fed lowering interest rates in response to declining inflation numbers. Sure, enough the Fed lowered interest rates 3 times feeding the exuberance of the markets. Lower interest rates pushed markets to records repeatedly through most of the year. As the year wore on, lower short-term interest rates followed the Fed, but intermediate and long-term rates seemed to be focused on other issues. With lower short-term interest rates, the yield curve moved closer to normal with the 10-year Treasury rate yield higher than the 2 year and 3-month rate. In fact, through the end of the year and beginning of this year, this shift continued with short term interest rates staying stable but intermediate and long-term rates continued to increase. The increase in rates has finally caught the notice of equity markets. There is consensus concern about increasing inflation and believe it or not, concern about the federal deficit.
Uncertainty has risen about a still strong economy to cause equity markets to be jittery. Markets do not like uncertainty, and we have more than our share right now. Just this week, Los Angeles is on fire impacting wealthy, middle class and lower income neighborhoods alike. The cost estimates for rebuilding and repairing range from $10-$20 billion. This could easily double as the fire continues to burn. Before these fires, we had a homeowners insurance crisis. With these fires and with many of these homes insured by the state sponsored FIRE insurance program homeowners will be faced with a real question of affordability to rebuild. FIRE caps coverage at $3M per claim and has inadequate reserves to cover its liabilities. Owning real estate has taken on a new risk. We have a relationship with a sponsor of multi-unit investment properties. They were in due diligence to purchase a property in Marin County. They could not find an insurer to cover the property other than FIRE and commercial mortgage lenders have minimum reserve insurance requirements and credit ratings. They could not find an acceptable insurance company to offer insurance. They cancelled the purchase. There is no easy solution to this. Before the LA fire, the CA state insurance department modified their rules to keep insurers in the state even though the increases in premiums would be substantial. We will see if that plan works after this fire.
In the News
America’s best decade, according to data - The Washington Post
How a New Year’s Resolution Can Set Up Your Financial Goals for Success
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