Newton’s third law states that “for every action there is an equal and opposite reaction.” From a physics standpoint, the quote means whenever an object applies a force to a second object, the second object applies an equal force to the first object. Let’s put this quote to the test with respect to finances today.
Thanks to the COVID pandemic and the resulting supply chain dysfunctions, we are dealing with inflation levels not experienced in the last 40 years.The Federal Reserve’s tool to manage inflation is to increase the federal funds rate. This results in increased costs for individuals and corporations to borrow money. To date, the Federal Reserve has increased interest rates five times in 2022, and there are still two scheduled meetings before the end of 2022. And inflation remains stubbornly high…. So interest rates were increased with the intention of lowering inflation, and inflation is NOT lowering. So much for Newton’s third law as it may pertain to finances….
Now let’s consider the interest rate increases. You might think that interest rate increases will significantly impact the real estate market since it is much more expensive to borrow money. It has impacted the real estate market, but I’m not sure I can say that it has significantly impacted the real estate market…. Buyers are still buying and at times, at a price much higher than listing price in certain markets. Again, so much for Newton’s third law as it may pertain to finances.
Since higher interest rates increase the cost of borrowing for corporations as well, this can affect company earnings. But the performance of several public companies are exceeding Wall Street’s estimates, including Coca-Cola, General Motors, United Parcel Services, Google and Apple to name a few. Dare I say it – so much for Newton’s third law as it may pertain to finances.
Higher interest rates also boost bond yields, making the bonds more attractive investment opportunities. This could, in turn, make stocks less attractive by comparison. Isn’t this why we diversify portfolios between stocks and bonds? Remember the conversation on the 60% stocks and 40% bonds to buffer downward risk of negative equity returns? Well 2022 is disproving that diversifying between stocks and bonds will buffer downward risk on your retirement portfolio. Year-to-date, bond returns are down around 15% while the S&P 500 is down approximately 20% year-to-date. So much “for every action having an equal and opposite reaction.”
Let’s forget Newton’s third law. If it was intended for finances, 2022 would have disproved the theory. What is all of this saying about our economy for 2023? Are we looking at a recession? According to experts, there is a 50% likelihood that a recession will occur between now and the end of 2023. But they are expecting the recession to be short lived as the Federal Reserve will pivot to monetary easing (eh-hem, reducing interest rates!). Experts are saying that gross domestic product (the measure of the health of our economy) is expected to accelerate in 2024 after lagging in 2023 and that inflation should normalize in 2023 as the Federal Reserve will start to reduce interest rates.
What to do now? If you are several years away from retiring, invest excess cash flow into the market. Stock market volatility is providing opportunities for you to grow your wealth over your working years. Invest when stock prices are down! There are ways to secure your retirement despite high inflation and potentially higher tax rates. One is to take advantage of stock market declines. If a recession will be short lived, you need to be prepared to invest when the time is right!
If you like annuities, purchase them now! Make sure your rate is locked in for a specified period (for example, Multi Year Guaranteed Annuities) or even cap rates for a fixed index annuity. There are annuities which are locking in cap rates for a specified period. Take advantage of the higher interest rates now. If a recession does occur, the Federal Reserve will reduce interest rates. And annuities will quickly follow suit by reducing interest rates.
There is absolutely no way to predict what will happen with the stock market in 2023, whether a recession will occur, and how long the recession will last. I am not much for trusting ‘expert’ opinions, and those opinions vary drastically. Instead, I focus on making sure that my clients are prepared for whatever may happen while working their way to retirement. Instead of dreading the potential for a recession in 2023, take advantage of it! This might be your opportunity to get ahead of your retirement goals. But you must take action to get ahead!
DISCLAIMERS:
All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.
Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.