Daily Commentary

MarketMinder’s View: Please note, this article mentions several specific banks, and MarketMinder doesn’t make individual security recommendations. Those referenced here are coincident to a broader theme we wish to highlight. First, a little background: Back in 2023, US regulators proposed updating capital rules for financial institutions—the headliner being a 20% increase in banks’ capital requirements. While the news wasn’t a shocking development—banks had known something like this was coming for years as part of global “Basel IV” capital standards—the industry pushed back hard against the seemingly aggressive interpretation (while also increasing their capital in preparation for the potential regulations). Now regulators are scrapping the proposed capital requirements while tightening asset valuation standards, which this article finds mostly sensible. As it notes, the upshot will likely be to bring more commercial lending back to traditional banks, reversing the move toward private credit since 2008, and it might also give banks more latitude to implement share buybacks. The article also sensibly notes that while banks may get back into the residential mortgage game, this isn’t likely to help with home affordability, as more widely available mortgages tend to lift house prices by boosting demand. Where we disagree is with the headline fear, which the conclusion touches on: that there is a significant risk the biggest banks may deploy all this spare cash in a hurry, potentially overheating the economy and housing markets since freeing up $200 billion in capital could add $1.7 trillion to the financial system (based on how banks risk-weight assets). While that is possible, we think it underestimates these firms’ risk management capabilities and their ongoing tendency to be more judicious than the rules require. Bankers are also aware the political winds could shift and the next White House could push stricter capital requirements. Uncertainty discourages risk taking, and policy on this front has flipped every four years since 2016. We can’t predict what the future holds, but banks aren’t blind to potential political and regulatory risks, and any overheating isn’t going to happen overnight. Investors have time to watch and weigh things as they play out. For more, see Fisher Investments Research Analyst Davis Zhao’s 2023 commentary, “Those ‘New’ Bank Capital Rules? Old, Slow-Moving News.”

MarketMinder’s View: The introduction lays out a plausible-sounding, financially traumatic scenario: “Imagine a prolonged market downturn that depletes your savings in the years right around when you retire, forcing you to sell stock at a loss to meet living expenses. Even if the market bounces back, great returns on a shrunken pile of investments can’t make you whole. Retirement dreams are kneecapped from the get-go.” This is the titular “sequence of return risk,” and the article worries the scenario may be brewing given recent geopolitical uncertainty. To combat this, the financial advisers interviewed here offer a host of options, from holding a mix of asset classes to “smooth the overall ride” to holding up to three years’ worth of annual spending needs in liquid assets. While we have a few issues with these approaches (investing isn’t collecting a little bit of every asset class and too much cash comes with a big opportunity cost), investors benefit more from taking a step back and keeping a few core principles in mind. First, having to sell securities to fund cash flow needs in down markets is a risk whether you are 5 or 20 years into retirement, and both scenarios can raise the risk of depletion if your overall cash flow needs are too high. Focusing on this risk early in retirement only could risk limiting your compound growth potential, leaving you with less bandwidth later in life, just in time for late-life healthcare expenses to mount. It may also make people underestimate the risks of taking higher cash flows during down markets later in life. For people with high cash flow needs, keeping 6 – 12 months’ worth of distributions in cash may be a wise choice whether early or long into retirement. For other folks, simply having a blend of stocks and bonds may ease the risk of depletion by limiting a portfolio’s expected volatility. Some folks may prefer reducing expenses when markets are down. What is right for you will depend on your entire situation—goals, needs, time horizon, comfort with volatility and other personal considerations. There is no cookie-cutter solution.

MarketMinder’s View: As the Iran war approaches its third week, developments in global energy markets continue dominating headlines. The latest: The world’s largest liquefied natural gas (LNG) hub, located in Qatar, sustained “extensive damage” after an Iranian missile attack, curtailing production partially for a setback for a nation that is responsible for nearly 20% of global LNG supply. Now various outlets worry that disruptions to global gas supply are likely to last longer than two months. “The surge in LNG prices and a further reduction in supply could lead to severe impacts for Asian and European economies. (The United States, as the world’s largest LNG exporter, is largely insulated.) Almost 90% of LNG from Qatar and the United Arab Emirates was delivered to Asia last year, with Bangladesh, India and Pakistan most reliant on these shipments, according to the International Energy Agency (IEA).” As the article relays, these disruptions are having real consequences in countries reliant on Qatari LNG: Pakistan has shut down schools for two weeks while India is rationing natural gas for manufacturers. While it is hard to tell how much if this is pre-emptive measures to battle panic-buying, the struggle is real either way. Yet Europe isn’t in as dire straits thanks to nuclear and alternative energy sources, and interestingly, for all the concerns raised here, most are focused on higher prices rather than predictions for blackouts and rationing (as we saw in 2022). We realize that is cold comfort for those facing higher prices, but from a global perspective, the economies currently hit hardest by recent energy turmoil aren’t major drivers of global GDP—unlikely to materially affect what markets in the developed world care about. For more, see last week’s commentary, “Rounding Up Odds and Ends From Global Energy Developments.”