My Dear Client Community,
I hope this note finds you well and getting ready to enjoy the beginning of summer.
I write to very briefly comment on the state of the economy, recent Federal Reserve interest rate changes, and stock market behavior.
The U.S. Economy
The U.S. economy is currently doing quite well. Balance sheets for individual and business are the best they’ve been in many decades: savings and asset levels are up and debt is historically, quite low. Both individuals and business keep spending. So all is still good here.
The Federal Reserve on the other hand, has recently noted that inflation is running quite high due to factors under and not under its control. The concern here is that abnormally high inflation can become “sticky” and entrenched in the economy. For reasons that are beyond the purpose of this note, suffice it to say the fed does not want persistently high inflation to continue. Persistently high inflation is undesirable for many reasons and the fed is right to address it.
Inflation and Interest Rates
The fed’s main tool to address inflation is by raising interest rates. As interest rates go up, the cost of money/borrowing goes up for individuals and business. When interest rates increase, less projects get undertaken, less things get purchased and the economy slows. From Econ 101: There is less demand and prices come down. This is ok as long as demand doesn’t come down so much that unemployment increases to unacceptable levels.
And this is where stock market behavior comes in. Many market participants believe the Federal Reserve was blind to inflation in the economy up until only recently and now these participants are concerned that the fed may overcorrect with its interest rate increases thereby causing a significant recession as well as high unemployment. Whether this comes to pass no one has any clue. Media and talking heads will debate it ad nauseum and the market will exhibit volatility.
My firm, unshakable belief is that the current issues will get resolved because they always have. We have 200 years or so of stock market history showing us that this has always been the case. We have many bright people running the most profitable and most well run companies in the U.S. and the rest of the world who will turn any crisis into opportunity. This is what they do so they can return money to their shareholders (that’s us) and not only keep their jobs but get compensated according to their performance.
So what do we do?
For accumulators in our client community, volatility is a godsend. Keep doing what you’re doing with your regular pension contributions, dollar cost averaging into your brokerage accounts, or investing some or a lot of the extra cash you’re holding. I.e., carry out your investment and Retirement Income Plans.
For members that are in the drawdown phase of their lives, know that you should continue living your lives and doing what you do. You have Emergency Cash Reserves for the express purpose of helping you weather the financial storms that regularly arise.
And for all members of our client community: limit or stop altogether, reading or watching financial commentary. It is not good for your mental health. The purveyors of financial media do not have your financial success as part of their business plan.
Lastly, please do reach out to me if you have any questions or concerns and we can schedule a time to discuss.