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Inflation and the Bear Necessities: Q1 of 2022 Economic Update Webinar

We are still dealing with COVID. We’ve seen empty shelves and inflation. We’ve watched Build Back Better drift from headlines to the dusty recesses of media memory. We’re staring down a bear market. As a result, our team has had many clients looking at their portfolios, watching the headlines, and raising questions about their investments. Our second webinar of 2022 included a discussion of economic issues here in the USA and around the world, and some action items you can take to protect your financial plan.

Inflation

There’s a simple equation for inflation: when you have supply chain constraints, but consumers still want to buy, you get inflation. And anytime you talk inflation, you need to look into the Federal Reserve and interest rates. 

What are the interest rates doing right now?

Federal interest rate increases are making their way through the economy. Currently, the 10-year treasury is sitting at about 3%, and the 30-year mortgage rate is up to 5.6%. Historically speaking, these rates are still moderately low, but they are much higher than we’ve become accustomed to, and are likely to increase over the next couple of months. 

So why is the Fed raising interest rates? Demand outweighs supply in many areas, especially with continued supply chain disruptions and geopolitical tensions. Yet unemployment remains historically low at about 3.6%, which is bolstering the Fed’s actions to raise interest rates. In an ideal world, the Fed’s role here is to keep unemployment low while also reducing inflationary pressures. The Fed’s tools in this case are adjusting interest rates and buying or selling financial products. These actions can speed up the business cycle by providing liquidity to the economy when unemployment is spiking and GDP is slowing; they can also serve to reduce inflation by slowing the economy down.

With rising interest rates, are bonds a safer bet?

Bonds can be a good part of your retirement portfolio and add ballast during uncertain times. Right now, there’s some opportunity to lock in higher interest rates with new bond issues. But remember that the Fed is not done raising interest rates. When rates go up, the bonds you’re holding decrease in marketable value. While higher interest rates often make bonds seem more attractive, we always recommend talking with your financial advisor to make sure it fits into your long-term financial plan. 

Consumers can keep spending 

Consumer spending comprises 60-70% of the US economy. Where consumers go, corporate earnings go, so earnings will continue to come in. Consumer spending continues to set records moving to the end of Q1, and there are a few reasons why we think consumers can keep spending: 

  • Many people were able to save some stimulus money and improve their household balance sheets by paying down debt. 
  • They were also able to refinance their homes, buy vehicles, or purchase other large-ticket items financed at very low interest rates. 
  • Unemployment is relatively healthy (below 4%), and the US still has more job openings than people to fill them. 
  • People are also leaving their jobs at record paces. As an employee, it’s a good opportunity to go out there and put your skills on the market. Employers, on the other hand, need to make sure that their compensation levels are competitive.

What’s happening around the world?

The current market conditions in the US are not unprecedented around the world. Chinese equities have seen dramatic swings, and China continues to struggle with population declines. We haven’t forgotten that there’s a war going on in Europe. While we aren’t discounting the significance of the Ukraine conflict, we do want to point out that China is still the United States’ biggest trade partner. If we stopped all trade with Russia, we might not feel it that much here in the US economy: we still are number two in energy production; we are still number one in oil production; number one in natural gas; number three in food.

Even as Russia reduces its production of oil and sanctions kick in, the other groups that are in the business of selling oil and moving it around the world are taking this opportunity to fill their coffers. There is also the capacity for additional oil production here in the US. 

Taxes and elections

Although talks about tax policy have quietened down a great deal (overshadowed by inflation, the Russia/Ukraine conflict, and continued COVID variants), the Build Back Better bill is most likely dead. 

We also have midterm elections coming up. Politically, it doesn’t make sense to try to push a lot of significant changes leading up to the election. However, the results of these midterm elections could have a considerable impact on future tax legislation. Back in March, the Biden administration released its plan for the fiscal year 2023, which included several proposals to raise taxes. One of the proposals is to raise the US corporate rate from 21% to 28%. This would mark the first increase since 1993, keeping in mind that a 28% corporate tax rate would still rank among the lowest in US history. To pass this new budget, 50 senators would need to vote in favor of the proposals. Current business threats

IRS delays, service failures, and difficulties

At the end of 2021, the IRS still had 35.3 million returns waiting to be processed; this after reducing its labor force by 33,000 full-time employees. We encourage you to be patient if you are awaiting communication from the IRS and continue to keep your business on the right side of tax laws. 

Employee retention

One of the biggest issues we’re hearing from multiple clients is the challenge of finding qualified talent. At our firm, we’re using a two-pronged approach to solve this problem:

  1. We’re more creative with our recruiting efforts.
  2. We’re giving our employees options to work in the office or remotely and have adopted more flexible working hours. 

We couldn’t accomplish a flex work environment without the right cloud technology to run our business.

Cyber threats

Cybercriminals continue to become more and more creative with the ways they attack individuals and businesses. We highly recommend implementing cyber security training for your employees, no matter how big or small your company is. Education is key, and knowing what to look for is so important. Sure, it can take a small investment to get the right security training, but it can save you thousands of dollars in the long run. If you have any questions about the security of your financial data, please talk with one of your advisors so that we can recommend secured software and processes to ensure your business is protected.

How do we protect our wealth in volatile markets?

Your plans don’t change because the market goes up and down. The most important thing you can do is stick to your long-term plan. We’ve been blessed with long periods of growth, but as the economy cycles, we see periods where the market dips. As investors, we need to stick to the plan and understand that the market is going to correct from time to time. In the long term, the market cycle will come back around, but consistently moving in the right direction. 

Buy good companies and hang on

One of our famous sayings is that there are plenty of reasons to be optimistic about stocks. If you bought your stocks and held them over the last few years, you’ll be pretty happy with where you are now, even though a lot of us at the end of March 2020—and even into 2021—would not have anticipated returns to be as strong as they were. Things are changing in 2022, but we’ve done very well by buying good companies and hanging on over the last few years. Some of the major factors influencing the markets in 2022 include midterm elections, supply chain issues, what’s going on in the corporate world, and federal spending. 

If you are concerned about your current strategy, 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. Please join our upcoming economic update webinar mailing list if you would like to be notified of future webinar dates.

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