Last week was a volatile one for the markets, as retail sales and factory output data for the end of 2021 was weaker, inflation has been higher, and the Chairman of the Federal Reserve testified before Congress. The current consensus is that the central bank will raise interest rates three to four times this year, in an effort to curtail inflation. Factor in continued Omicron worries, and it adds up to a wild ride for the markets. In the long run, we still expect a positive year for stocks, even after the rocky start to 2022.
The classic definition of inflation is too much money chasing too few goods. We understand the too few goods. Covid shutdowns of businesses, coupled with logistical challenges, have led to backlogs and empty shelves. Demand for certain products has also been higher, as spending shifted from travel, entertainment, and dining out to home renovations. The chip shortage caused a shortage of new vehicles, leading to increased prices in new and used vehicles.
On the other side of the coin, the households at the top of the K-shaped recovery were saving money during the Covid shutdown. Commuting costs and entertainment savings went towards paying off debt and shoring up savings. In fact, personal savings has increased by $2.7 trillion. Much of this came from the government stimulus payments which, in the necessary haste to help Americans who were suffering, were paid to many people who weren’t affected by Covid and didn’t need the money.
Data from the St. Louis Federal Reserve Bank shows that the annual spending rate before the pandemic, in February of 2020, was $14.8 trillion. In less than two years, that number rose to $16.4 trillion. That’s an increase of $1.6 trillion dollars in spending. Since March, we’ve added another $1 trillion, the fastest increase in spending rates on record. This is the too many dollars side of the equation.
Increasing interest rates makes it more expensive to borrow, and reduces the amount of money available to purchase goods.
You action item to take this week is to look at any variable interest rate loans you have, and consider if it makes sense to convert them to fixed-rate loans. If you are carrying balances on credit cards, expect those rates to increase this year and work towards paying them off as quickly as possible.
We have two events this month. Our signature Women, Wine & Wisdom goes co-ed for January with our economic update on the 18th. And on Sunday, January 23rd, our six-week High School Financial Literacy class begins. You can register on our website at covingtonalsina.com.
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