Even though the stock market is above historical averages returns of 6 to 8% per year, the inflation debate continues between those who regard current rate spike in inflation as transitory, and those who think it’s permanent. We believe history suggest neither is correct. The real issue is how long the spike will last before receiving to a lower level +/- 3% in the next 18 to 24 months.
There are three primary causes of this inflation spike which are related to COVID-19: Labor shortages, reduced availability of goods and services, and supply chain disruptions causing price increases.
COVOD-19: These new strains are significantly impacting the labor market and caregiving responsibilities. This data as reported in the news on Bloomberg strongly suggest that the key to returning to a normal labor market is by moving from current pandemic stage to the endemic stage in which we learn to live with such conditions.
Given the new COVID strains (first Delta now Omicron) emerging, the inflation rate should remain elevated into next summer or winter, the end of the Quantitative Easing (QE), and tapering program is likely to result in increased Fed funds rates to banks according to Fed Chairman Powell followed by interest rate for mortgages and general loans. The Federal Reserve will have difficult choices in the coming months i.e., whether, when, and how much to increase rates given the impact on the economy. Our evaluation of the economic information being presented on Bloomberg and other news sources suggest the economy will remain solid in 2022 just not as strong with lower expected GDP growth declining from about 6% this year to 3% to 4% next year while the economy continuing to recover from the pandemic and supply chain pressures.
The stock market has experienced three straight years of exceptional growth. Nevertheless, we expect continued slowing the rest of 2021 given the emergence of the new Omicron strain. We expect shifts in market activities. Being diversified helps protect personal risk tolerance from such shifts as the market struggles. The key to stock market progress next year will be a function of inflation trends as the supply chain normalizes, and the ability of the Federal Reserve to manage monetary policy. We believe the Build Back Better bill reduced from almost $3 trillion to about $1.5 trillion sent to the Senate will be trimmed before it hits the president’s desk.
We understand reading a market pull-back is looming might be unsettling to some but rest assured, working with us on your goals is key to riding this out! Remember, your investment nest-egg is designed to carry you another 15-20+ years not just for today, so balancing your tolerance for the market with realistic expectations and leaning into us for guidance will ensure your assets work the best they can for you. Making “knee-jerk/emotional” reactions to volatility without your goals changing could lead to unwanted losses and ultimately, could negatively impact your retirement success.
We do believe the economy is still in good shape and in general, systematic dollar cost averaging (especially when the market is “on sale”), maxing Roth IRA’s if able, and converting future taxable IRA dollars to tax-free Roth dollars is prudent. We ask to please give us a call for further discussion regarding your specific plan.