Death, Taxes, and Market Volatility
It’s always difficult (some say impossible) to accurately explain the entirety of the financial markets at any single point in time. There are several macro factors affecting the equity, bond, and real estate markets as a whole that are worth acknowledging as well as our response to them. Its important to note, this is not personalized financial advice, do not take this as investment advice and please reach out to us concerning any opportunities you may have before you pursue them.
First and foremost, inflation is the bogeyman that has likely been blamed for all of the market woes at one point or another and it is as complex a problem as any. Once thought to be transitory, inflation has become a significant and unwanted guest at everyone’s table the past 18 months. So, what has caused the recent rise in inflation? Well put simply too much money was put too quickly into the market. (Shocking we know). A combination of COVID relief checks and small business loans, war in Ukraine, and the beaten-up supply chains are raising the cost of living for everyone across the globe.
COVID has been an extremely divisive issue and COVID relief stimulus has done nothing to subdue the polarization. Regardless of one’s beliefs about the necessity or morality of these cash payments to citizens, they have undoubtedly increased the money supply within the US. As with any influx of cash into a system, price levels tend to rise with the newfound income. Small business loans, not required to be paid back, also increased government spending. All told the stimulus bills approved by Congress have increased the money supply by 5 trillion dollars since early 2020.
The war in Ukraine has led to inflation across Europe and the globe at large. 10-15 years ago, you may not have been able to locate Ukraine on a map, though by now you likely know that it is the breadbasket of Europe. Russia has severely limited natural gas and oil exports to Europe citing “aggression by western powers”. On Tuesday (9/27) explosions on undersea gas pipelines from Russia to Germany were detected and a spill ensued, further decreasing the likelihood of continued exports of natural gas. Due to lack of supply of natural gas and oil, energy prices in Europe will increase this winter. Coupled with a lack of grain exports from war-torn Ukraine, the price of food and energy will continue to increase significantly across Europe. This rising price level will bleed into the United States through trade.
Supply chain issues have limited the availability of goods as global shipping and manufacturing infrastructure trudged through the COVID-19 pandemic. With the advent of work from home and more generous compensation many chose not to go back to work in the difficult industry. These labor and material shortages have exacerbated the supply chain issues already being experienced post COVID. Now as prices rise due to an increased money supply and rising wages, a decrease in supply of goods put many consumers in a strangle hold where they see their grocery and energy bills increase drastically in just a few short months.
So, what’s the verdict on inflation? Is it here to stay or can we expect to be back in the reasonable 2% range shortly? Well as with anything its complicated, the only thing we can assert with any degree of confidence is that inflation will not be under control by early 2023. Presently the increasing interest rates (three hikes of 75 points in a row) and the current Euro-Dollar parity makes us hesitant that inflation will be under control anytime soon. However, we are finding an increasingly popular and attractive option to hedge against inflation in I-bonds or inflation bonds. We have a blog already posted about them, if that is an opportunity that you may be interested in give us a call so you can see how they may be a part of your financial picture.
Stock Market Downturn
If you’ve been keeping up with the stock market you’ve likely been seeing a whole lot of red. . It’s no secret, as of the writing of this newsletter the Dow is down 20% year to date, the S&P 500 is down 24%, and the Nasdaq has suffered a 33% loss; overseas doesn’t look any better with the developed markets down over 30% and emerging markets down even further; just look at the chart below.
As with any market movements, the causes are extremely complex and likely won’t be fully understood for a few months or years to come. There are a few macro factors that are easy to diagnose: rising rates, inflation, the conflict in Ukraine, and midterms all play a role.
As mentioned above the Federal Reserve just increased the Fed Funds rate by 75 basis points (3/4 of a percent) for the third consecutive rate hike of 75 points. Rising rates are usually a harbinger for a recession and the market behaved accordingly. Increasing rates have trickle-down effects for most consumers by making debt more expensive. That includes credit card debt and mortgages, we have already seen a doubling of mortgage rates from as low as 2.75% to over 6% on new mortgages. In July of 2022 home prices decreased across the country for the first time since 2012. Due to the precariousness or rate hikes the Federal Reserve is attempting to walk a fine line between taming inflation and staving off a significant recession.
As discussed in depth above inflation and the conflict in Ukraine both have had an adverse effect on markets. We don’t expect to see regular inflation levels soon and the invasion of Ukraine has lasted far longer than anyone has expected. With no end in sight, we cannot accurately project with any certainty what the markets will do in the coming 6, 12, or even 18 months.
The last important factor worth mentioning here is that the midterm elections are coming up. As with the lead up to any election uncertainty has scared some investors and left others on the edge of their seats. If the Republicans win a majority in either house it is unlikely that any legislation that is not extremely bipartisan will be passed in the next two years. If the Democrats maintain control of both houses, we may see more legislation prior to the next presidential election as they try to shore up their election possibilities. In short, we are not in the business of predicting elections and we won’t know what the markets will do until after the midterm results.
“So where does this leave me?” you may find yourself asking. We’ll there’s good news and bad news:
The bad news is that markets are down 18%-30% year to date, we are experiencing high inflation, and Russia is once again in the news for the wrong reasons. We don’t know when any of those three things will turn positive, but history shows us that they will.
The good news is that we know they will eventually come to an end. We know that regardless of whether or not we enter a true deep recession like we did in 08’ that we will come out of the other side. In the depths of the housing crisis, we had nowhere to go but up and following that market correction we enjoyed 10+ years of relatively stable, positive economic growth. Inflation, at the rate we are currently experiencing, isn’t sustainable and will break in the future, the Fed is already taking a crack at it by raising rates. I can’t comment on Russia, but I can suggest you go rewatch Red Dawn over the weekend.
Admittedly the uncertainty of down markets can be terrifying, seeing retirement accounts decrease is a scary prospect. However, like all recessions before it, this too will pass, and we will see another period of economic growth on the other side.
If you have questions about how the market downturn may affect your financial plan, please feel free to reach out to us. Even if you’re not a currently client we are happy to guide you through these turbulent markets.
Written by Devin McCombs