Inflation reports came in higher than expected, with the Consumer Price Index[i] up 8.3% over last year. This has stoked fears of increased Fed tightening, or rising interest rates. It is widely expected that the Fed will raise rates by 0.75% next week. As we’ve discussed before, increasing rates can trigger a recession, or contraction of the economy.
Historically, when the government and the Fed work together, the economy can achieve a soft-landing, or slowing of the economy while keeping inflation under control and unemployment low. When the government continues to spend heavily, as with the misnamed Inflation Reduction Act and the recent student loan forgiveness program, the Fed has been forced to sharply raise rates, plunging the economy into a recession.
The same things that work when the economy is good work in recession: First, increase your employment opportunities by building and keeping in contact with your professional network, adding to your knowledge base with new skills and certifications, and brushing up your resume and LinkedIn profile. Next, look at your personal finances. Build emergency savings, ideally to six months of living expenses. Pay down credit card debt and, if possible, pay off your cards in full every month. Look into increasing your credit limits and even opening a Home Equity Line of Credit to provide funds if the worst happens.
Finally, don’t look at your statements. If you must, look at the number of shares you have instead of the dollar amount. If you are working, this is a phenomenal time to invest – with every paycheck, you’re buying into your 401(k) at a 20% discount.
If you can’t help yourself and you do look at your accounts, you may notice that both stocks and bonds are down right now. Usually, diversification – owning multiple types of investments – provides a buffer, because when one asset class is down, another is often up. Bonds are going down right now because interest rates are rising. It makes sense when you think about it: why would someone pay the same for your bond at 3% when they can buy a new bond at 5%? This doesn’t mean you should get out of bonds altogether. In fact, rising rates can work in your favor over time. As bonds mature and the principal is paid back to the bondholder, new bonds can be purchased with a higher interest rate, or yield. Over time, the bonds in your portfolio will pay out more interest than they were before rates started rising.
Your action item this week is to finalize your tax return if you haven’t already done so. The deadline is October 15th if you are on extension. Once your return is final, check your withholdings and make sure they are in line with your tax bill.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
[i] Bureau of Labor Statistics