Preparing for rising interest rates
Many people are trying to figure out what is happening in the economy.
January was a tough month in the stock market. The S&P 500 dipped briefly into correction territory. This is described as at least a 10% drop from recent highs. It ended down 5.3%, the biggest decline since in January 2009. The other two major indexes were also lower.
This volatility was because the FED pivoted from their easy money policy.
They are trying to reduce their balance sheet by ending qualitative easing. This was where they were buying huge quantities of government bonds. They have also announced interest rates will start to rise, probably next month. There is a lot of speculation about how many rate hikes will happen. Right now, some estimates are it could happen maybe six or seven times. One FED governor has said they could even be open to half point increases if necessary.
All of these actions are taking place because of the current inflation rate which is the highest in 40 years.
Gasoline is up over 50%. Food items are up substantially and many major consumer manufactures are announcing price hikes. Fast food has increased in price significantly with many items up 25%. These prices are not going back down because wages have gone up to attract employees and the cost of supplies are not going down.
The stock market does not like rising interest rates.
They slow the economy, which is their goal. This makes people spend less and reduces corporate profits. It also raises borrowing cost for companies and makes it more expensive for companies to buy back their own shares of stock. It also will probably increase payment that bonds and CDs must pay. This gives investors more options to earn income, which means fewer people will be willing to take stock market risk.
The speed of growth in the economy has also slowed since the beginning of the year.
Economists speculate that this is because we do not have as much inventory build now. The supply chain issues that we heard about in the news are improving some. This means that items that were out of stock are now on store shelves waiting to sell. People also have less extra money left over from the stimulus checks and extra unemployment benefits. These funds are being used to offset inflation.
You must make sure that your family is prepared for all of these changes. Your asset allocation must match your time line. Younger investors can take more risk if it matches their risk tolerance. People close to retirement or into it usually must be more careful. When you are in the distribution stage of the money cycle, sequence of returns risk can sink retirement for some people. This is when losses early in the distribution cycle can make you run out of money.
Remember to consider taxes on your investments. FINRA says they are one of the biggest deterrents to retirement. Inflation is similar to a tax because it decreases your buying power. Have a comprehensive plan to deal with all of the variables in your financial plan.
If you do, retirement will probably be much more enjoyable.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.