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Market outlook with stagflation potentially rearing its head

There is a lot going on in the world and the economy right now and market moves seem to hit the news everyday as volatility increases.

Market & Economy

Every single security and asset class seems to be going down. There is almost nowhere to hide. Even cash will make you lose purchasing power. Why? Because we are experiencing the highest inflation we have seen in 40 years. Over half of Americans have never seen prices rise this fast. It will likely come down in the coming 12 to 18 months but I expect it to settle at a higher rate than we’ve seen in the past. Interest rates are climbing from near zero. This hurts anyone who wants to buy a house as mortgage rates have gone from 3 to over 5% in the last couple of months and interest on HELOCs, credit cards, etc. are rising fast. Many of the problems we are seeing right now are a direct result of the easy money policies of the Fed and the government stimulus during COVID. Trillions of dollars of funds were sent out to citizens who saved it, used it to quit work and buy lots of products and stuff since services were shut down. Now people are transitioning to spending on services as the world opens. Asset prices skyrocketed, partly due to this flood of money. Not productive investment that creates new jobs, new products or new markets. Just simple asset price inflation. But read the details and we are starting to see layoffs start as inflation and continued supply chain snarls eat into profits. All the while we have over 11 million job openings (I expect this to start dropping real fast), record low unemployment and some of the lowest total workforce numbers we’ve seen in years. The 5+% wage gains aren’t enough to get people from sitting on the sidelines. Compare wage gains to inflation (5 – 8 = -3) and the average worker is actually falling behind. That’s not even considering the increased use of credit cards to help people keep spending at levels they’ve grown accustomed to because of their “increased wealth” from the rise in asset prices. We may soon be looking at a consumer credit bubble which will only be made worse with higher interest rates. And all that government debt? Refinanced at higher rates? What programs will have to be cut to pay the higher interest costs over the next few years? All this is positioning the U.S. economy for a possible bout of stagflation. High inflation, low growth and high unemployment.

What To Do

That’s a heck of a lot of bad news. So what to do? I’ve learned the hard way not to try and time markets. It is not the exit that matters but rather the re-entry. Most people mistime the entry and miss a massive run up in asset prices. If you had sold stocks in March 2020 during the crash and not gone back in until June 2020 (just 3 months later), you would have missed over 75% of the recovery in stock prices.

What investments you have in the market keep there. Rebalance according to your plan, look at possible tax loss harvesting and re-entry after the wash sale rules for taxable accounts. Retirement accounts? Just keep them invested. Keep saving. Watch your spending. And if you have cash on the sidelines, keep it there for now. We may see a bear bounce, stocks rising by 10% or more. But we could then see another 15 to 20% drop from there (or more). If we do, that’s when you put the excess cash to work. But unless your overall financial plans have changed drastically (decided to quit working and sail the world, move to Tahiti), stay the course and ride the storm. Always focus on what you can control (spending, savings, your health) and try not to focus on that which is out of your control.

Hang on for the ride and most importantly, enjoy the summer.

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