Today’s Investment Conundrum

Just when you think you’ve seen it all, the US economy and investment outlook looks more confusing than ever.

American consumer confidence is at all-time lows and for good reason. 40-year high inflation, horrific crime in our big cities, wide-open southern border, and big losses in the stock and bond market in the first half of 2022 are key ingredients to low confidence.

Causes of 40-year high inflation:

1. Our current federal government leadership is admittingly trying to slowly destroy our country’s fossil fuel and natural gas industries in the name of Climate Change. The issue is energy production and prices are at the core of US production and the prices Americans pay for goods in this country.
2. Trillions of dollars were added to the economy in the name of economic stimulus. Printing money to give handouts, ends up costing people much more due to high prices in the long term.
3. The supply chain slow-downs haven’t helped inflation either as supply issues for things like building materials and chips dramatically drive up prices for many items.
4. More money chasing fewer goods (used cars and single-family homes are great examples) are causes of inflation

The current administration has been successful so far in reducing our domestic fossil fuel and natural gas (cost has tripled since the beginning of 2021) production while we all suffer from massive price increases everywhere we look.

Unfortunately, roughly two-thirds of Americans lived paycheck to paycheck before this massive inflation increase. For most families, inflation has added at least $300/month to their cost of living. While you may be able to easily afford the increase, most people will blow through the little savings they have quickly and rely on credit cards until those are maxed out.

Inflation will continue to be high until the nation’s energy policy reverses. I don’t see that happening under the current administration. If the only solution is to keep raising interest rates, it will get uglier for the American economy.

Bright Side:

1. Interest rates have gone up (this is one cause of stock price declines) so bonds are offering more attractive returns. The current 10-year Treasury yield has crept up to roughly 3%. Your new bond or mortgage fund investments (prices went down when interest rates rose) will earn more than they have in many years. The issue is interest rates are coming nowhere near keeping up with current inflation rates.
2. Stock prices have dropped significantly in 2022. The S&P 500 (18%) and the NASDAQ by 25% year-to-date, which may mean the lower prices reflect what the economy is going through. Buying low has always worked out for long-term investors.
3. Corporations are still making money (profits)
4. Coming off really bad 6 month periods has historically been a great time to buy. See chart below.

5. 3 Reasons It Is So Bad It is Good Article Link

Hence the current conundrum.

I’ve taken a defensive approach for clients in or near retirement until this administration changes energy policy or is voted out.   I’ve never been a market timer because all the public information is already built into stock prices. I think it’s prudent to play more defense these days, especially if preserving principal is a priority over the growth of your portfolio.  This means moving some money out of stocks and into money markets or short-term bonds. Other asset classes where I have added portfolio money to increase diversification include commodity funds, gold, and rental real estate developments to potentially capitalize on inflationary trends.

Let me know if you would like to talk – my schedule link