The S&P 500 Index fell just over 3% last week. We saw a small increase on Wednesday after the election. Then on Thursday, the market dropped several points, largely on fears that a Democratic majority will increase regulation and stifle growth. In the past, markets have done best with a split government. The Democrats do not have a super majority and would be unable to override a presidential veto. A split government tends to produce more bipartisan legislation. In the end, what the markets care about is stability and consistency in laws and regulations.
Previous policies, such as excess Covid-era spending and the poorly named Inflation Reduction Act, have led to continued high inflation. The Federal Reserve Bank is tasked with price stability, which is defined as inflation averaging 2% annually, and full employment, defined loosely as an unemployment rate around 4%.
Inflation is why a dollar today is worth more than a dollar tomorrow. If the cost of food goes up 5% over the next year, I need $1.05 to purchase what I could buy for $1 today. One of the most expensive things you can do is to keep large amounts of cash on hand.
Most checking accounts do not pay any interest, so holding large amounts in checking, even if you are earning a quarter of a percent in interest, means you are falling further behind every day, as inflation strips purchasing power from your checking account.
Moving anything beyond what you need for the month to a high yield savings account or money market will increase the interest earned to just over 3% for most accounts. This allows your money to keep up with inflation, meaning you are breaking even.
Downturns like Thursday’s are a great time to invest excess cash. While it can vary by family, we typically recommend having six months of living expenses in liquid, easily accessible assets. Of this, $25,000 in a high yield savings account or money market will cover most immediate emergencies. Holding the rest in an investment account can allow your money to make money. You can get to it at any time and only pay taxes on the gains.
Your action item this week is to start saving for the holidays if you haven’t already. Transfer money each paycheck to a savings account and then stick within that budget for gifts and entertaining.
If you have a question you want answered, email us at info@covingtonalsina.com. Be sure to check out our Facebook page or website to see our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.