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economy and investments

Whether you’ve been investing in the markets for decades or are just getting started, it’s important to have a future-focused plan that enables you to make informed decisions when economic forces make headlines. News reports don’t always provide an accurate reflection of the economy and investments. Our first webinar of 2022 included a discussion of many topics within the public markets and the global economy.

Is inflation here to stay?

Inflation has been one of the hottest topics for 2021—rightfully so with a rate of 7%. Inflation has proven to be strong over the past year, and we have all felt it in one way or another—rising oil, vehicle, and consumable prices to name a few. Some of the factors contributing to inflation include: 

  • High consumer demand 
  • Supply chain issues leading to low supply of consumer goods and luxury items
  • Production cost increases due to wages and raw materials
  • Americans have a surplus of cash and are willing to spend

Although some supply chain issues have improved in recent months, we continue to see these impacting many facets of the economy. While the relative rate of inflation is expected to drop this year, rising prices will continue to be a topic of conversation for the remainder of the year. 

Will consumers keep spending?

The data suggest that consumers have the ability to spend and are willing to continue spending at the rate which we have been seeing.

  • Personal savings rates are still above pre-pandemic highs
  • Household debt service is lower than it was pre-pandemic, with about half of the decline reversed. 

Consumers have cash in the banks, as well as the ability to borrow more for large purchases. Interest rates for 2021 were historically low, with a slight increase in the latter part of the year. 

  • The 10-year Treasury is now about 1.8%
  • The 30-year mortgage rate is about 3.9% 

We expect interest rates to continue rising throughout 2022. The rise in interest rates will mean buyers have less credit to spend, which could affect housing prices. The current combination of low supply and high demand for homes have created a seller’s market. First-time homebuyers are struggling to compete against investors and those with the ability to pay cash, well above asking prices. 

Labor shortage is a real issue for businesses

Unemployment rates are now at pre-pandemic levels, with weekly jobless claims near where they were before the pandemic. The number one challenge both small and large businesses are experiencing is finding people who are willing to do the work. Labor participation has improved slightly in recent months, but it remains an issue in all industries. Businesses have been leveraging technology, such as cloud-based accounting, to protect the business from fraud, streamline processes, and enable remote work. When using technology, companies can acquire remote employees, removing geographic boundaries on the talent pool. 

Another great sign of consumer confidence is the rate at which people are voluntarily leaving their jobs. They either have a position already lined up, have a healthy savings, or trust that a new position will present itself.

What’s happening at the federal level?

We continue to see headlines about proposed legislation—emphasis on the word proposed. We could see the Build Back Better plan broken up into pieces, but it seems unlikely to pass as a whole. The best advice we can give in regards to the proposed legislation is to be cautious with the headlines, don’t act on emotion or fear, and when in doubt, trust the guidance of your financial advisor and CPA. Your CPA will be the first to know and understand how any changes will impact your financial situation and can provide guidance based on the changes.

At the IRS, delays and service failures march onward. On average, we are seeing a 20-week resolution turnaround. If you receive a notice from the IRS, we recommend providing your CPA with the document as soon as possible. To accommodate for the delays, we have added a compliance department that is solely dedicated to IRS resolution matters. If you receive a notice claiming to be from the IRS, but have any concerns about the legitimacy, do not provide any personal information. Reach out to our team or the IRS directly.

Market analysis and stock performance

The S&P 500 was the top-performing index for 2021, followed by NASDAQ and the Dow Jones. Investment grade and aggregate bonds experienced a decline in 2021 due to rising interest rates. Energy, real estate, and the financial sector continued to be the highest performing sectors. Moving into 2022, the factors that may drive the market include:

  • The Federal Reserve’s interest rate and tapering decisions
  • Inflation and consumer spending
  • Corporate earnings and supply chains
  • Midterm elections 

The market was due for a correction, which we all saw early this year. History has shown that the market drops 30% from its high once every five years for a correction. When an event like a market correction occurs, we see a lot of clients making decisions driven by fear and panic. It is always best to focus on your long-term financial plan. A correction can provide a great buying opportunity. 

Corporate earnings in general are higher than they were pre-pandemic, which is a great sign of the health of the overall economy. Continued increases in corporate earnings benefit investors in return. Companies that have a track record of making money, and returning dividends to investors, have historically beaten inflation.

At the end of the day, we remind our clients to buy companies, not headlines. Stay on top of what’s happening in the economy and with your investments, but also be clear about your long-term financial goals. Have a strategy in place and work with a trusted financial advisor that has your best interests as a top priority. Diversify your portfolio, including within the traditional markets but also considering real estate investments, personal savings, and emergency funds. If you know your financial goals but are lacking a strategy to get you there, send us a message. We would be honored to be your trusted advisor. Please don’t hesitate to reach out with any questions on the topics covered in our webinar. If you would like to be notified of future webinar dates, please join our upcoming economic update webinar mailing list. 

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