Economic Crystal Ball: What I Think of Economic Forecasts

The first quarter rite of passage for financial advisers seems to be attending economic forecasts.  Yes, it is absolutely as fun as it sounds.  Zzzzzz.


I try to avoid these meetings because market forecasts are almost never right and not one is ever called to account for their not-rightness.  Like weather forecasting.  Also, I feel like the purpose is to freak people out (the forecasts are mostly apocalyptic) but not really give you any useful tools to avoid the next Financial Armageddon.


And yet, like the children and rats of Germany following the Pied Piper, I find myself drawn to at least one presentation a year.  This year it was a program put on by the Financial Planning Association featuring a bright young guy from Guggenheim.  Guggenheim is mostly a bond investor, so the presentation focused on risk in that area of the market.


What I Learned


The first important thing I learned was never send a Microsoft PowerPoint presentation to someone with an Apple Mac computer to project your slides from said Mac.  It does not work, and your charts are all distorted leaving you embarrassed in the middle of a presentation.  Not Guggenheim Dude’s fault – FPA of Colorado, you need to get a real PC for your Audio/Visual guy.


Back to the forecast.  The point that was supposedly illustrated by the charts (we’ll never know) is the risk in the investment grade corporate bond market.  These are bonds issued by corporations that are rated BBB or better.  Guggenheim’s concern is that bonds rated BBB (the lowest of investment grade) make up a much larger-than-historical portion of the investment grade bond market.  Another worry is that credit raters have been more lenient on their grading, meaning many corporations may not be as healthy financially as you expect.


Who’s who in the BBB rated bond market?

You might be surprised: Dow Chemical, General Electric, Goldman Sachs, Credit Suisse, and McDonald’s are some examples.


What’s the risk?

If a recession happens and these companies are less able to service their debt than we thought, they could be downgraded to junk bond status.  If that materializes, the investment grade corporate bond index funds have to make massive changes to keep their holdings in mostly high-quality debt.  Also, the prices of your investment grade corporate bond funds could take an unexpectedly bit hit.


Remember, we don’t buy bonds or bond funds for the exciting ride and potential growth.  We buy them for safety and a counterweight to stocks during a recession.  Which, to be clear, I am not predicting.  Sheesh!


What to do?

I don’t know and I am NOT giving investment advice in this blog.  The Guggenheim people say this BBB bond thing is the next economic bubble (as we fondly remember housing, tech, and tulips).  They recommend sticking to US Treasury and mortgage backed bonds in your fixed income holdings.  That’s not always the savior people think but that’s the suggestion.  From Guggenheim.  Not me.


Straight from my ambivalent fingers, the Sullivan Financial Planning sort-of-but-not-really, mostly repeated from someone else, 2020 economic forecast.


You are welcome.

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