Economy Update - November 7, 2022

I'm writing today as the third quarter has come to an end and it feels like we are experiencing a giant long nightmare over the last several years.  At the beginning of 2020, society was stopped in our tracks as we had to navigate Covid-19 and our total economic shut down. These last two years have been a daily and constant state of chaos.  At home schooling and working remotely, vaccines and boosters, travel restrictions, shortages of goods, products and employees, U.S. Government actions and stimulus payments which have boomeranged into more dollars chasing fewer products.  This has led to inflation, which has led the Government to try to fix the problem. The Fed has raised interest rates that they left artificially low for too long.  As I wrote about earlier this year, higher interest rates lead to less “big ticket” items being purchased and if we are not buying homes or new furniture or new cars, then those companies that manufacture or sell those items are less profitable and are therefore less valuable.   What you are witnessing in the stock market is a manifestation of this in real time.  However, the stock markets are a predictor of the future worth of these companies; the stock market is always looking months out into the future to identify the correct value of these companies. 

What we are experiencing now is the market trying to identify when the Government will stop raising rates because inflation is “under control”.  When will the Federal Reserve Bank stop contracting our money supply?  They have been doing this since June by ceasing their bond buying program and are now shrinking their balance sheet by over $90 billion dollars every month.  The net effect of this action is that the Fed is pulling a second “brake lever“ on our economy.  At some point they will succeed in slowing our economy and hopefully get inflation back to desired levels.  We only hope they don't overdo it and put us into true economic recession.

This economic stuff is very complicated and can be scary at times.  What I have written about above are the current headlines over the last several years, but the specifics don't matter because over my 30 years in this business we have had multiple similar events where there are scary headlines and the market, and the economy reacts negatively, just like this time.  Fortunately, we can use our experience to help guide our next steps.  Every decision is personal and based on your facts and your timeline.  If you are an accumulator and not using the money for several years, then clearly you have the advantage of time to wait for markets to improve.  Now is a good time to continue your long-term funding plans, buy more shares while prices are low.  Make sure your emergency funds are adequate to cover the increasing cost of things like gas and groceries.  Continue to take full advantage of employers matching programs, if you have IRA's that have decreased then maybe a conversion to a Roth IRA. If you don't want to create such a large tax burden for this tax year, then maybe a partial Roth IRA conversion makes sense.  For those taking income, largely we have utilized investment products that have guaranteed income riders or investments that have a history of consistent income payments even if the price has gone down.  It can be scary to see less money in your account but in many cases your investment is able to produce the same income even with a lower share value because the income calculation is based on the number of shares owned and not the value or price of each share.

We would welcome the opportunity to review your current income plan with you to be sure you are on track to continue to fund your retirement as you have planned for.  Please contact my office if you would like to discuss further.