For Southern California residents, we hope you stayed dry during the weekend! We appreciate the questions received since our last market update. The greatest volume of inquiry centered around the US credit downgrade, as well as our thoughts on a potential recession and homeowners insurance claims. The commentary below will address these three issues; keep the questions coming!
Homeowners Insurance Issues
An unfortunate trend we have been reading, as well as hearing anecdotally, is the increase in premiums or outright cancellation of homeowners policies in higher-risk states. These include California, Texas and Florida. California has seen an average of a 25% increase in premiums since 2015, with Florida and Texas seeing 57% and 40% increases respectively. The cause? In general, an increase in natural disasters, combined with the rising costs to fix the associated damage. One way insurers are able to increase premiums is to raise rates after a claim is made. Filing a claim leads insurance agencies to believe filing a future claim is more likely. This is especially true for claims related to water damage, dog bites, and theft. One approach to mitigate increases is to not file a claim unless the damage is significant. It is tough to put a dollar amount on “significant,” as this is different for every household. In general, “significant” would be north of $5,000. Another strategy many are taking is to increase deductibles, as the intention would be to use insurance claims only for significant/catastrophic damage. In general, increasing your deductible from the common amount of $2,000 to $10,000 will save you approximately $400 per year (varying by situation). The same logic holds true for auto insurance. In general, don't submit a claim unless it is significant, and raise your deductible as much as you are comfortable.
Credit Downgrade
The U.S. Credit rating was recently downgraded from AAA to AA+. According to the rating agency Fitch, this was due to ongoing political dysfunction and the high (and growing) government debt burden. Fitch noted the repeated debt ceiling standoffs in Congress as damaging to confidence in U.S. fiscal management. While their critiques are highly valid, the impact of the downgrade is more symbolic. In the corporate bond world, credit ratings matter. If a company is on shaky ground financially (a.k.a. lower credit rating), then investors demand a higher rate of interest to compensate for lending risks. Higher interest rates make it more expensive for the company to borrow money. Investors have thousands of alternate companies they can lend money to, so it is helpful to compare one company's credit rating to another. This relationship gets more complicated (and murky) when considering government credit ratings, specifically that of the U.S. The United States has had the largest economic output of any developed economy by a factor of 5. China, (technically an ‘emerging’ economy, and rated lower at A+) has the second largest economy. However, China has their own economic issues, along with long-term distrust within the global economy. Simply put, the U.S. is in its own economic weight class, and credit ratings have a muted impact due to the lack of alternatives for investors. U.S. Treasuries, the asset most likely to be impacted by a debt downgrade, have been largely unaffected since the announcement.
Recession Breadcrumbs
For over a year, economists have been forecasting a recession based on inflation fears and the Federal Reserve rate hikes. Since then, the unemployment rate hasn't budged, housing prices have remained stable, and GDP has grown. Furthermore, the Federal Reserve and JP Morgan are forecasting we could avoid the anticipated recession. However, breadcrumb-like signs of a recession are starting to appear. Job listings have slowed dramatically, China’s economy is slowing down, banks continue to be on thin ice, and consumer savings rates are declining. The current economic picture is as clear as mud. What is clear is that our economy has shown more resiliency than many economists originally thought. Hopefully, this trend will continue to push the economy through our next recession, whenever it may appear.
As always, if you have any questions, please do not hesitate to reach out. We look forward to providing you with more market updates related to your questions.
Citrus Wealth Management
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