In our post pandemic economy, all eyes are on the Federal Reserve and the tools at its disposal to unwind the effects of the unprecedented Covid-era stimulus. Fed Chairman Jerome Powell and his cohort face a formidable challenge as they try to cure one economic ill (high inflation) and prevent another (recession) when the treatment for one is contraindicated for the other.
For now, Powell has made his choice: fight inflation by raising interest rates and reducing the emergency-sized Fed balance sheet to intentionally slow the economy and inhibit consumer demand. In effect, the Fed is administering high doses of inflationary chemotherapy while trying to avoid the significant side effect of a ravaged economy. As Powell put it in a July 27 press conference, “We’re trying to do just the right amount, right? We’re not trying to have a recession. And we don’t think we have to.”
What are the odds of this approach working? Historically, the Fed’s success rate in fighting inflation while avoiding a recessionary “hard landing” has been mixed. The Wall Street Journalfound that of the previous 11 battles the Fed has fought against inflation, six produced “soft landings,” where inflation and economic growth were reduced without causing a recession.
So it is possible. But interest rates are rising at the fastest pace in U.S. history. Add to that the slowdown in GDP growth, record debt, and rising geopolitical tensions, and a recession is looking dramatically more certain. Bloomberg estimates a 100% chance of one within the next 12 months.
If inevitable, a modified bright side of a recession in 2023 is that stock markets tend to bottom out ahead of recessions. Equity markets are forward-looking indicators, which means that often the worst-case scenario is priced in ahead of time. From peak to trough, the median S&P 500 drop during recessions since 1948 is around 24%—which is comparable to the lows set thus far in 2022. The S&P 500 average decline during the past nine recessions was -1.5%, and in four instances it actually generated positive returns. Timing a market bottom is nearly impossible, but by the time the doomsday scenario arrives, equities may already be headed higher.
As the market continually digests new information, it is easy for clients to lose track of the bigger picture. As ever, during volatile markets we recommend that investors avoid trying to time the market and emotional responses to short-term volatility. We advise patience and a return to investment principles such as long-term thinking, diversification, and taking advantage of market conditions to selectively tax-loss harvest and rebalance.
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Vacationers scratching their travel itch this season are sending prices through the roof. Here’s how some are making trade-offs.
Capri Coffer socks away $600 a month to help fund her travels. The Atlanta health-insurance account executive and her husband couldn’t justify a family vacation to the Dominican Republic this summer, though, given what she calls “astronomical” plane ticket prices of $800 each.
The price was too high for younger family members, even with Coffer defraying some of the costs.
Instead, the family of six will pile into a rented minivan come August and drive to Hilton Head Island, S.C., where Coffer booked a beach house for $650 a night. Her budget excluding food for the two-night trip is about $1,600, compared with the $6,000 price she was quoted for a three-night trip to Punta Cana.
“That way, everyone can still be together and we can still have that family time,” she says.
With hotel prices and airfares stubbornly high as the 2023 travel rush continues—and overall inflation squeezing household budgets—this summer is shaping up as the season of travel trade-offs for many of us.
Average daily hotel rates in the top 25 U.S. markets topped $180 year-to-date through April, increasing 9.9% from a year ago and 15.6% from 2019, according to hospitality-data firm STR.
Online travel sites report more steep increases for summer ticket prices, with Kayak pegging the increase at 35% based on traveler searches. (Perhaps there is no more solid evidence of higher ticket prices than airline executives’ repeated gushing about strong demand, which gives them pricing power.)
The high prices and economic concerns don’t mean we’ll all be bunking in hostels and flying Spirit Airlines with no luggage. Travellers who aren’t going all-out are compromising in a variety of ways to keep the summer vacation tradition alive, travel agents and analysts say.
“They’re still out there and traveling despite some pretty real economic headwinds,” says Mike Daher, Deloitte’s U.S. transportation, hospitality and services leader. “They’re just being more creative in how they spend their limited dollars.”
For some, that means a cheaper hotel. Hotels.com says global search interest in three-star hotels is up more than 20% globally. Booking app HotelTonight says nearly one in three bookings in the first quarter were for “basic” hotels, compared with 27% in the same period in 2019.
For other travellers, the trade-offs include a shorter trip, a different destination, passing on premium seat upgrades on full-service airlines or switching to no-frills airlines. Budget-airline executives have said on earnings calls that they see evidence of travellers trading down.
Deloitte’s 2023 summer travel survey, released Tuesday, found that average spending on “marquee” trips this year is expected to decline to $2,930 from $3,320 a year ago. Tighter budgets are a factor, he says.
Too much demand
Wendy Marley is no economics teacher, but says she’s spent a lot of time this year refreshing clients on the basics of supply and demand.
The AAA travel adviser, who works in the Boston area, says the lesson comes up every time a traveler with a set budget requests help planning a dreamy summer vacation in Europe.
“They’re just having complete sticker shock,” she says.
Marley has become a pro at Plan B destinations for this summer.
For one client celebrating a 25th wedding anniversary with a budget of $10,000 to $12,000 for a five-star June trip, she switched their attention from the pricey French Riviera or Amalfi Coast to a luxury resort on the Caribbean island of St. Barts.
To Yellowstone fans dismayed at ticket prices into Jackson, Wyo., and three-star lodges going for six-star prices, she recommends other national parks within driving distance of Massachusetts, including Acadia National Park in Maine.
For clients who love the all-inclusive nature of cruising but don’t want to shell out for plane tickets to Florida, she’s been booking cruises out of New York and New Jersey.
Not all of Marley’s clients are tweaking their plans this summer.
Michael McParland, a 78-year-old consultant in Needham, Mass., and his wife are treating their family to a luxury three-week Ireland getaway. They are flying business class on Aer Lingus and touring with Adventures by Disney. They initially booked the trip for 2020, so nothing was going to stand in the way this year.
McParland is most excited to take his teen grandsons up the mountain in Northern Ireland where his father tended sheep.
“We decided a number of years ago to give our grandsons memories,” he says. “Money is money. They don’t remember you for that.”
Fare first, then destination
Chima Enwere, a 28-year old piano teacher in Fayetteville, N.C., is also headed to the U.K., but not by design.
Enwere, who fell in love with Europe on trips the past few years, let airline ticket prices dictate his destination this summer to save money.
He was having a hard time finding reasonable flights out of Raleigh-Durham, N.C., so he asked for ideas in a Facebook travel group. One traveler found a round-trip flight on Delta to Scotland for $900 in late July with reasonable connections.
He was budgeting $1,500 for the entire trip—he stays in hostels to save money—but says he will have to spend more given the pricier-than-expected plane ticket.
“I saw that it was less than four digits and I just immediately booked it without even asking questions,” he says.
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