This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
It is generally good to know where you are.
When hiking in the woods, you bring along a compass and a trail map. When driving in unfamiliar territory, you use Google maps or your car’s GPS to keep your bearings.
The financial markets are far more disorienting than the very terrestrial concepts of North, South, East, and West. The financial markets spin on their own multi-dimensional axis every day, making the task of figuring out where we are quite challenging.
Here is what we know about our current location:
- The Federal Reserve has rapidly raised its overnight target interest to the highest level since July 2019 while also reducing its ownership in U.S. Treasury bonds and mortgages. Their interest rate policy is now (what they believe is) close to “neutral” – a level where it is not providing economic stimulus but also not reducing economic demand during normal times.
- Inflation has been raging over the past year, but commodity prices have fallen over the last two months as traders digest the impact of a potential future recession.
- Corporate earnings estimates have started to fall for the next 12 months as analysts factor in a slowing economy.
- Bond yields are inverted with shorter-term debt yielding more than long-term debt. Bond traders are currently projecting that the Fed will raise its overnight target interest rate a few more times in 2022 and then cut it in mid-2023.
- Economic reports are quite mixed. Unemployment remains historically low, but job losses have picked up from record lows. Housing starts have plummeted, but vehicle sales remain strong. The economy has (barely) contracted for two consecutive quarters.
- Geopolitical tensions are high with active invasions, energy interruptions, and food scarcity.
- The mid-term elections are now just over three months away.
Unlike hiking or driving, you are not in control of your future location. The financial markets are a compilation of every traders’ carefully crafted opinion about the future combined with their current emotional state.
That combination makes the financial markets’ future path quite unpredictable. However, at this very point in time, it feels like we are at a delicate crossroads with two equally viable short-term paths forward from where we are:
Path 1: Stock traders come to the conclusion the markets have gone too high too fast following the June 16 low and decide to retest it (driving the markets lower).
Path 2: Stock traders reach the conclusion the future is still brighter than they thought just a couple of months ago and the market recovery continues to churn higher.
Thankfully, as investors, we understand that the daily turmoil caused by stock traders is the price of admission for the potentially higher returns included in our long-term financial plans. Trader-induced short-term volatility does not impact our long-term plans.
To us every trading day is simply the first of 2,000 trading days over the next eight years. If we plan to sell some of our investment assets for cash flow within eight years, we simply don’t allocate those funds to stocks.
While we think we know where we are right now from a market perspective, we do not know where we are going tomorrow.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Quote of the week:
Leo F. Buscaglia: “Worry never robs tomorrow of its sorrow, it only saps today of its joy.”
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