I believe we have now reached a brand new normal when it comes to inflation and won’t hit the Fed’s 2% goal. We have moved away from predicting three rate cuts this 12 months and are actually expecting only one or possibly none in any respect. Some experts are even predicting that rates will rise barely. The April jobs report revived hopes that the economy is slowing and inflation is easing. It even sparked a rally within the stock market and a few dovish comments from the Fed. But let’s not get too excited. One month doesn’t signal a trend.
You’re probably wondering what’s really happening with the economy and rates of interest. And what might that mean for the stock market and your investment performance? That’s how I see it.
As we celebrated the New Year, inflation was trending downward and there was lots of optimism about three rate cuts in 2024, one in all which was imminent. All that modified in the primary quarter, when inflation rose for several months in a row. As a result, the Federal Reserve decided to maintain rates stable and stated its intention to maintain rates high for so long as crucial to bring inflation under control.
Current rates of interest pose a significant challenge to our consumer-driven economy, especially for young individuals who have astronomical rents or mortgages, large automotive loans, and mountains of bank card debt. Higher borrowing costs will mean that young singles or families could have less money to spend on purchases at Starbucks, McDonalds, Kohls, Walmart, or wherever else they spend their money. Lower consumer spending can ultimately impact the economy and ultimately depress corporate profits.
In contrast, people nearing retirement don’t often borrow lots of money. Generally, they only have an existing mortgage with a low rate of interest of three or 4%. Managing investment performance shall be the largest challenge for mature investors as high inflation and rates of interest turn out to be increasingly depressing for the stock market. I do not think inflation and rates of interest will necessarily drive stock prices down, but they might well slow the upward movement of costs. Think of it like marathon runners who suddenly have 5-pound weights strapped to their ankles. They may have the option to run fast for some time, but ultimately they’ll get drained and decelerate. They should be within the race, but their performance will suffer.
Right now, I be certain that my early and retired clients are well diversified. I prefer a really balanced portfolio, in lots of cases with a conventional mixture of 60% equities and 40% fixed income. There has been an enormous run-up within the equity markets over the past six months, and I counsel my clients to take some chips off the table and turn out to be slightly more conservative. That doesn’t suggest they need to attempt to time the market. It also doesn’t suggest they need to reduce their equity allocation to 40%. Older investors still need long-term growth because they’ve a life expectancy of 25, 30, and even 40 years after retirement.
I find that traditional allocation with a mixture of stocks and bonds or bond substitutes gives clients more security at the moment. Earning 5% interest from boring old money market funds is an important thing and I encourage people to reap the benefits of that. Bonds are also an option but I’m not in favor of pushing the investment horizon too far into the long run because if rates of interest rise your capital is in danger.
All in all, I believe we want to recalibrate our expectations of how the market will perform this 12 months. In addition to inflation and rates of interest, it is a presidential election 12 months, the Middle East is in turmoil, and the U.S. budget deficit continues to grow. Personally, I shall be completely satisfied with earning between 7% and eight% on my investments in 2024. That looks as if a reasonably good return given the uncertain situation we’re currently in.
I agree with former Treasury Secretary Larry Summers, who recently said that the more we find out about this economy, the more uncertainty there’s. But remember, you haven’t got to let uncertainty unsettle you. Think about your personal funds logically, not emotionally. Ultimately, your financial planning should deal with the remainder of your life, not one or two years.
