June 15, 2022 Update – The bear has returned to Wall Street

As of Monday, June 13, we’ve officially entered a bear market in the U.S.. A bear market occurs when the S&P 500 Index is down more than 20% off its recent high.

On Wednesday, June 15, the Federal Reserve raised interest rates another .75%, the largest single increase since 1994. This follows a .5% rate increase in May and Chair Powell indicated it would not be the last increase we will see in 2022 with at least one more .5% or .75% increase likely.

When rates go up, it’s more expensive to borrow money. You can expect to see this reflected in mortgages, home equity lines of credit, credit cards, student debt and vehicle loans. Businesses large and small will also feel the impact of rising interest rates which adds to the rising costs related to sourcing, staffing, and materials.

Money in your bank accounts might actually see (a little) interest rate increase. Unfortunately, even that increase is unlikely to keep pace with inflation.

The annual inflation rate for the United States is 8.6% for the 12 months ended May 2022, the largest annual increase since December 1981 and after rising to 8.3% reported in mid-May. Some pundits indicate the odds of a U.S. recession within the next 24 months is higher than 50%.

Our message from May still applies in terms of ways to increase your peace of mind. And, of course, remember we’re always here to help address your concerns.

May 17, 2022

This is not a message filled with “happy talk” and optimistic predictions about the future. Nor is it a message of doom and gloom. Rather, this is a reality-based message and right now, our global reality has more than its share of anxiety inducing uncertainty we would like to acknowledge.

The pandemic, the Russian/Ukraine war, inflation, unprecedented government spending, and the downward trajectory of both stocks and bonds are real events worthy of more than a few restless nights. We’re seeing the decimation of wealth among the middle class unlike anything we’ve experienced since the early 1980s. That is the unfortunate reality of today. But, if history is any indicator, this too shall pass, albeit likely to be more slowly than any of us hope.

Recently the Fed has taken action to slow the economy by raising interest rates. For laymen, this is easy to understand when looking at mortgage rates. Mortgage rates have increased multiple percentage points in just the last two months, decreasing the buying power of people in search of a home in an already over-valued market (which reduces demand). This same effect is experienced outside of the housing industry as corporations and governments pay higher interest rates when raising money for various endeavors.

For the last ten years, we’ve had a pretty glorious ride. We’ve witnessed strong market performance with years of double-digit gains. Short-term bonds, with their lower risk and lower reward ratios, were accessible for short-term financial needs while allowing the stock market to provide long-term growth. While the current declines in both stocks and bonds are disquieting, they are not fully unexpected nor as severe as they could be given the totality of the global perfect storm, we are weathering. And, sorry to say, the reality is that there is still room for things to dive more.

Short-term US Treasury bonds are down about 2.5 percent this year while long-term US Treasury bonds have seen a more severe decline of about 20 percent. Typically, when interest rates increase, prices of existing bonds decrease. As the Fed continues to raise interest rates and inflation approaches double digits, we should be prepared to see further declines in the bond market.

Now a word about inflation. Just two years ago, inflation was 1.4 percent, and today it is 8.3 percent. Everything from fuel to baby formula is impacted by inflation and until that’s brought under control, we’re in for an expensive ride, literally and figuratively.

It’s hard to watch your buying power and accumulated wealth being eroded. Regardless of where you are on the socioeconomic ladder, you’ve worked to get where you are and it’s painful to see your nest egg negatively impacted. Here are a few ideas that might help bring some peace of mind to you as we navigate through this dive and move toward stronger times once again:

• Don’t check the stock market every day. It goes up, it goes down. Watching its daily movements doesn’t do anything for you. Trying to time the market is folly. We continue to monitor your portfolio and will adjust when appropriate.
• Stay focused on your goals. We’ve developed a financial plan together based on your risk tolerance and other factors that keep your long-term objectives intact. Fluctuations are expected and built into your long-term plan. Regardless of volatility of stocks and real estate, they represent the best long-term hedge against inflation. Nonetheless, we still need cash and short-term bonds for distributions and relative safety.
• If you have a question or concern or simply need to have a calming conversation, give us a call. We don’t profess to have a crystal ball, but we do have experience and may be able to offer some insights. And we have a disciplined process to remove some of the temptation to respond emotionally to current circumstances.

Without a doubt, things feel tough right now. But a good way to think of things may be this analogy. You started with a small pizza and over the last ten years or so, it has nearly doubled in size. Now we’re having to share a piece of it, but we’re sharing a small piece from a much bigger pie. There’s still a lot of that larger pizza left and many more years of feasting to be had.

Hang in there. We’re here if you need us.