💰 5 Fact Friday: A Tale Of Two Americas

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Hey Money Maniacs,

Welcome back to another edition of 5 Fact Friday! Here are this week’s biggest stories in the world of money:

1. The Financial Divide Grows 🤨

As markets continue making all-time highs and inflation proves to be a fickle beast, we’re seeing a clear divide between two segments of the American population.

A Tale of Two Americas

1) The Soaring: This group is loving the market’s rally.

Their wealth grows in tandem with their investments. Plus, they only spend a portion of their income, so they are less impacted by rising prices.

Thanks to the market’s upswing, they feel wealthier and continue spending — fueling the economy and arguably further inflation. For them, it's among the best of times.

2) The Sinking: On the flip side, a significant portion of the population is facing financial distress:

• According to Fidelity, a record 3.6% of 401(k) participants dipped into their savings early in 2023.

• The national average FICO score fell slightly to 717, marking the first decline in a decade.

• Credit card debt surged to a record $1.1 trillion at the end of last year.

• Over 18% of Americans reported a payment 30 days late or worse in the past year, as of Q4 2023.

• The net charge-off rate on credit card loans reached 4.15% at the end of last year, the highest since early 2012.

This group is struggling to keep pace with the cost of living. Because they spend a greater percentage of their income on living expenses, they feel every pinch of inflation.

Despite year-over-year inflation slowing down, the cumulative inflation over the past four years has been substantial.

The Dichotomy

This stark contrast highlights the uneven economic recovery post-COVID.

The “invested” population is enjoying prosperity, while those living paycheck to paycheck face ongoing financial stress.

This is why:

• So many Americans report feeling squeezed despite improving economic indicators.

• Investing is so important — it’s often the bridge from hardship to prosperity.

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2. The Fed Holds Rates Steady ✋

On Wednesday, the Federal Open Market Committee (FOMC) wrapped up its latest interest rate meeting. As expected, the committee held interest rates steady in the 5.25% to 5.5% range.

So, why did markets rip higher?

The committee’s 17-page report delivered two pieces of particularly good news:

1. Most FOMC committee members expect rates to fall in the 4.5% to 4.75% range at year-end, implying three 25bp cuts in 2024.

2. The FOMC’s GDP projections for the year were revised upwards by ~0.8%.

After a series of disappointing inflation results, these updates provided an optimistic outlook.

Not only is growth expected to be strong, indicating a bullish environment for equities; but also, rate cuts appear to be imminent according to committee members’ projections.

Even without direct action, the Fed still manages to move markets. We’ll have to wait until May 1st for the next such event.

3. Realtor Fees Are Now Negotiable 👀

Last Friday, the real estate world got a major shake-up. The National Association of Realtors (NAR) agreed to a landmark $418 million settlement, changing the game for how homes are bought and sold.

Here’s The Scoop

• Goodbye, Fixed Commissions: NAR's settlement will eliminate the requirement for home-sale listings to include an offer of compensation to buyers' agents.

• Hello, Negotiation Power: Now, buyers will have to agree on compensation with their agents upfront. This puts more power in buyers’ hands and may reduce the overall price tag of a home.

• Increased Upfront Cost: Unfortunately, this change frontloads brokerage fees. Instead of rolling these fees into the home mortgage, buyers must now pay their agents at closing. This could pose a challenge for low-income and first-time buyers.

The Impact

• Benefit: Americans currently pay over $25,000 in commissions for the average-priced $417,000 home. With these new rules, that cost could fall by $6,000 to $12,000.

• Drawback: Real estate giants like Zillow and Redfin saw their stocks plummet on the news of this settlement. Real estate agents will need to adjust to the market’s new (more competitive) dynamics.

• Risk: Tens of thousands of realtors may be forced to look for greener pastures. Those who remain may be incentivized to “steer” buyers toward more profitable transactions to compensate for lower commissions.

If you recently sold your home, congrats! You (and millions of others) may qualify for a slice of the settlement money.

And if you’re in the market for a home, consider holding tight unit July — when these rules become effective. You might just save yourself a few thousand dollars!

4. Momentum Rises Again 🚀

Let’s take a time machine back to the late '90s, not for the pop culture but for a financial flashback that's eerily relevant today. Remember the dot-com bubble? Well, factor investing trends are giving us a bit of déjà vu.

First, What Is Factor Investing?

Think of it as a strategy where investors pick stocks based on attributes or "factors" proven to influence returns.

• Momentum: This factor bets on the "hot streaks" of stocks. If a stock has been climbing, momentum investing suggests it might keep going up, at least in the short term.

• Value: Value investing is like bargain hunting. It involves picking stocks that appear underpriced compared to their fundamental worth. Think of it as finding a designer dress at a thrift store price.

• Growth: Growth investors are future-focused, choosing companies that are expected to grow at an above-average rate, even if their stocks don't seem like a steal today.

The Then and Now of Factor Investing

In the years leading up to the dot-com peak, momentum (and then growth) were the market's golden children. Traditional factors like quality, valuation, and dividend yield got left in the dust.

Fast forward to today, and we could be watching a bit of a rerun. Momentum is making a grand comeback, growth is treading water, and value? It's been left in the shadows.

In fact, value is underperforming to a degree not seen since 2000 and briefly during the 2020 pandemic panic.

This stark underperformance of value stocks may signal a potential goldmine for the patient investor. To realign with long-term averages, value stocks globally would need to outpace growth by a staggering 50% to 60%.

While the crystal ball of market timing remains as murky as ever, this setup hints at a significant opportunity for a trend reversal favoring value in the long run.

In the short term, riding the momentum wave is likely the best bet. But for those looking ahead, the real value might just lie in, well, value.

Picasso’s $139 million sale reveals unexpected investment opportunity

Just last month, an iconic Picasso painting shattered expectations when it sold for a whopping $139 million at auction. Impressive, considering it was purchased for around $1 million in the late 1960’s. 

But there’s a surprising group of investors also celebrating this sale: 61,000 everyday users of one investment platform. 

Why? Because that platform, called Masterworks, enables anyone to invest in blue-chip paintings by artists like Picasso and Banksy for just a fraction of the cost. When Masterworks sells a painting, investors can get a return. 

This way, not only the billionaires of the world can benefit from the art market.

As a special partner, readers can skip the waitlist to join here. 

Past performance is not indicative of future returns; investing involves risk. See disclosures at masterworks.com/cd.

5. Asset Classes: Volume 5 - Commodities 🪙

Ever wonder about investing in the stuff that makes the world go round? I'm talking about commodities like oil, gold, and wheat — those physical goods that fill our gas tanks, adorn our fingers, and feed us.

This week, we're covering the gritty world of commodities and why they might just be the spice your portfolio needs.

Why Commodities? For starters, they're a fantastic way to diversify. When stocks zig, commodities often zag. Plus, they're a classic hedge against inflation. As the cost of living rises, so typically do the prices of commodities, making them a solid bet for preserving your purchasing power.

Top Considerations: Investing in commodities isn't like picking stocks. You're dealing with physical goods, which means considering factors like weather for crops or geopolitical tensions for oil. And yes, these factors can cause prices to swing wildly, adding some unwelcome volatility to your investment journey.

Getting Your Hands Dirty (Or Not): You can dive into the commodities market through futures contracts, or keep it clean with ETFs that track commodity prices. The latter is much simpler and avoids the risk of needing to take physical delivery.

A Word of Caution: Commodities can be volatile. Their prices are subject to changes in supply and demand, which are often influenced by unpredictable events.

And broadly speaking, they haven’t been the best-performing asset class. The S&P GSCI Total Return Index, a popular commodity benchmark, has declined ~13% over the past decade.

So, while they offer great potential for diversification and inflation protection, they also come with a hefty dose of risk. For the vast majority of investors, commodity investing is not worth the hassle.

Thanks for tuning in to this week's edition! If you enjoy 5 Fact Friday, follow me on Instagram and Twitter to stay in touch.

Also, check out TheMoneyManiac.com for more resources on earning, planning, and investing!

Until next time,
Daniel

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.