As we begin July we begin the second half of the year. This year, the markets have not performed well and inflation is a challenging beast that is eating away at our assets. This combination of down markets and inflation is a double-whammy for most investors. It’s especially unnerving for retirees. For some younger investors, this is the first time in their lives they’ve seen this type of inflation and it can be a real opportunity. Read on for perspectives and tips on what to do now.
For Gen-Xers, pre-retirees, and retirees, this is not the first time in their lives many have seen this double-whammy combination. Think back to the beginning of the first term for President Reagan and the end of term for President Carter. We had lots of negative events influencing the Carter administration, and Reagan’s first administration. Inflation averaged an astounding 11.3% in 1979, 13.5% in 1980, and 10.3% 1981 before drifting back down to single digits over the next several years. (Read more at USInflationCalculator.com) Our highest inflation for 2022 has been 8.6% for May, still well below the early 1980 period. What was happening during this time? We had high unemployment, high interest rates, the Iran hostage crisis, the 1979 oil shock, the 1980 presidential election, and due to stagflation, the misery index peaked at 20.6 in 1980.
Currently, we are experiencing the highest inflation we have seen in decades (8.6% as of May 2022). However, the situation is quite different. We have very low unemployment, we still have relatively low interest rates compared to years past, and our GDP is still better than most other nations. But, we are dealing with consumers who are to some degree too willing to spend. A lot of cash was stashed during the pandemic from stimulus, bonuses, raises, and workers not spending on travel and other business costs. Now they want to spend that money and are actually one of the factors driving inflation. Yes, sometimes we can be our own worst enemy. When consumer spending is a driver of inflation, it’s out of fear that tomorrow’s price will be higher than today’s. War in Ukraine is also a factor. Although the US is not technically fighting in Ukraine (yet), we are suffering from the conflict. Other factors include the Trump tariffs that the Biden administration seems loathe to resend. The added costs of these tariffs get passed on to consumers in the form of higher prices for finished goods. Supply chain disruptions, another factor, lead to people wanting to be top bidder to secure the goods they need be it raw materials or finished retail goods. Labor, a key factor, is actually in short supply thus driving up prices due to workers commanding higher pay.
Through the transition from Carter to Reagan, the US economic situation was mostly negative due to a dampened economy. Currently, in our transition from Trump to Biden, the US economic situation is dealing with an overheated economy that has been building for decades. The Federal Reserve raised interest rates to try and quell this overheating. However, economic conditions have changed and we are much more globally intertwined than ever before. Raising interest rates may not do the trick this time. After all we do not have low unemployment, nor do we have an oil shock, and most of our economic indicators are solid. That’s what makes the markets being down for the year in conjunction with high inflation so infuriating. So, what can we do?
If you are younger, say in your 20s, 30s, or 40s, this could very well be a generational buying opportunity. Actually, any year the markets are down is a great time to buy. Keep in mind that the nation has passed through high inflationary periods before. We will pass through this current period as well. If you have a financial plan in place, it is a good time to revisit and make tweaks. For example, you might want to cut current spending so you can actually invest more. Yes, it’s a buying opportunity in the markets right now. Even if the downward trend continues into 2023, it is a good time to keep investing. Especially if you can make monthly buys whether in your taxable investment account, or by upping your contribution to your 401(k), or opening an IRA.
What about retirees? You may wish to dip into the cash holdings side of your portfolio or even your emergency fund. This takes stress off of your investment portfolio. For example, let’s say you are pulling $3,000 per month from your portfolio. Consider cutting this back and pulling a $1,000 from your cash holdings or emergency fund. This is a very rough example; work your numbers with your financial planner. Remember, don’t completely deplete your cash because you may need it if you have an emergency or if we go into a recessionary period. Building your cash holdings or emergency fund took a lot of time, you don’t want to deplete it completely.
For other more immediate tips, read 10 Inflation Survival Tips to help with your current spending. Keep in mind that even though the markets are down, and inflation is up, it’s a good time to take advantage of the situation. Invest more each month if you can. Pay off or reduce high interest rate debt. Take advantage of the current 9%+ rate on I bonds if you do have some extra, extra cash. Remember, that rate is the initial rate and changes but 9%+ on extra cash right now is great! Plus, the initial fixed-rate is set to change after October. The new rate may be higher.
Inflation and a lousy market are parts of the economic cycle. Just keep your eyes on the prize and remember that we will get through this and that it can be an opportunity. As an independent Certified Financial Planner™, I can help you tweak your plan and be there to remind you to stay the course. Contact me and let’s get started on a financial plan. #talktometuesday #education #Hireaplanner #stressfree #goals #budget #CFPPro #retirement #investments #betterfinances #inflation #recovery #recession