It’s amazing the amount of technical finance data that gets thrown in front of the average consumer. Hearing about jobs numbers, earnings reports, Fed minutes or unemployment numbers every time you open your browser is enough to make anyone’s head spin. Yes, this data is important, and yes, this data can affect your investments and savings, but what do these reports really mean? And to which ones should you be focusing your attention? The next time you open MSNBC or Fox Business, there’s one key stat that is going to have a huge impact on our economy: CPI. CPI stands for Consumer Price Index and is most closely tied to the inflation rate of the US dollar. Inflation, as you may know, is the growth in prices for goods and services in a country. Here’s why inflation is a big deal.
In 2008, in response to the market collapse, the US government borrowed trillions of dollars to jumpstart our economy in a process known as Quantitative Easing (QE). QE has had a number of consequences over the past decade: record growth in the stock market, extremely low interest rates, and an increase to our national debt. All three of these consequences affect the level of inflation:
- When the stock market grows for this long, so does inflation, meaning that even though you have more money in your investments, that money is technically less valuable (What good does $1,000,000 do for you if milk costs $5,000?).
- To fight this rampant inflation, the US government wants to convince people to take their money out of the stock market and put it into safer government securities, like Treasury Bonds and Bills. To do this, the government raises interest rates on their investments, making their option much more attractive.
- And finally, when you invest in government securities, they use that money to pay off the national debt among other things. Put another way, when inflation gets too high, the government changes their rates so you invest with them rather than putting money in the stock market.
So, finance jargon aside, how is this going to affect you? Over the past two years, the Federal Reserve has started to raise interest rates on government securities, meaning the fight against inflation has already begun. As rates continue to increase, money tends to flow out of the stock market and into these securities, which can lead to downward pressure on the stock market. Additionally, bonds you are currently invested in will lose value as newly issued bonds present more attractive options. Market corrections like this are hardly new, as they tend to happen every 7-10 years, with our last one being in 2008.
This is why we follow every aspect of the economy. No one can predict what the market is going to do, but we can give ourselves a pretty good idea. With all of this data about inflation and the fight against it staring us in the face, we have already taken actions to prepare our clients for a rising interest rate environment. We’ve moved out of longer term bonds and into short term bonds, limiting the impact of a decrease in the bond market. We’ve portioned off a section of both equities and fixed income into securities that actually go up with the rise the interest rates. Finally, with this transition, we have the ability to offer our clients investments that are uncorrelated with the market, giving you opportunity for growth in a down market. We will continue to track the evolution of inflation and interest rates, making sure that our clients are fully aware of any changes. Even if the economy has some rocky days ahead, we are confident in the plans we have made to achieve clients’ goals and objections and continue to watch over them with care.
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