You know you are getting older when you start to say, “I remember when I saw this before.” In the first quarter of 2022, I have been saying that a lot. For almost the last 10 years, the economy and markets have generally been in a time of a low inflation, low interest rates, accommodative Federal Reserve, high-earnings growth and moderate GDP growth. The S&P 500 has been up over 10% in eight of the last 10 years. Things have been good. Now we have even weathered a global pandemic over the last two years. You would think the economy and markets would struggle but guess what? The Fed dumped in over $4 trillion of cash and things turned from negative to positive quickly.

A Projection of What’s to Come

If you regularly read our letters, you will know we have been saying the path we have taken will eventually come with a price. The bill is now due. It will have a dampening effect on the economy but at this point, we don’t think it will kill it. Here are some of the things we project may be the outcome: 

• Higher interest rates —The Fed may raise rates 4-5 mores times this year. 
• The Fed will continue to taper bond purchases. 
• Inflation is now at 7.9% and will back off by 4-5%. The more transient inflationary factors will fade and Food, energy and wage inflation are the concern. 
• GDP will grow nicely at 3% but slower than before. 
• Unemployment is down to 3.6% and dropping. 
• M2 money supply has been up 40% over last 2 years, thus money that was spent just appeared out of thin air. This created a demand shock we are still unwinding from. Will take more time, thus high inflation is short term. 
• This inflation will harm consumers as wages tend to grow slower than inflation. Currently 32% of workers make less than $15 per hour which will greatly impact their buying power.  
• We’re still in an economic expansion because of strong household balance sheets, elevated consumer spending, rising wages and low unemployment. We believe this can continue for some time as long as the Fed is successful in a soft landing and stays ahead of rising inflation. 
• We’re still upside in U.S. markets. The Ukraine/Russia conflict heightened the risk of a recession in Europe. Foreign markets are cheap but might be a little early to dive into. That day is ahead sooner than later though. 
• A few things that are attractive to buy now: 
  • Energy & Commodities including Agriculture 
  • Infrastructure 
  • Materials 
  • Industrials 
• Only about 28% of S&P 500 are in these sectors. 
• Expect leadership to stay shifted from growth to value. 
• Fixed income will be tough near-term but still find returns in floating rate credit, private credit and municipal debt. 

There’s Hope in the Challenges

Sounds like a lot of things to be concerned about, right? Many things are changing and what made money over the last 10 years may not be the leaders in the next 10. The U.S. economy is still very healthy and robust. Even though we may be slowing down with interest rates and taxes up, we don’t believe the party is over. It’s just a different kind of party than we are used to lately. Here is the thing many of us are old enough to say: We have seen this before and there were challenges, but it all worked out OK.   

Regards,
Gregory B. Pierce, JD
President and CIO

For many years, we have been experiencing inflation in the healthcare industry.  Now we are seeing inflation in the housing market, at the grocery store, gas pump and entertainment. Portfolio Manager Greg Pierce feels that inflation will be here for a prolonged period.

Inflation can eat away at your retirement income. You may need to cut out luxuries, travel plans or the second home you planned. It can erode the purchasing power of your retirement savings and can impact your ability to live well during your retirement years. Inflation is a major issue and doing nothing could put your future plans at risk.

How inflation may hurt your retirement plan investment strategy

It’s important to understand and educate yourself on how inflation may hurt your retirement plan investment strategy. During retirement years, portfolios tend to be more risk adverse by adding bonds or more cash. Bonds are generally the most vulnerable to inflation risk because their payments are usually based on fixed interest rates. Cash is the most noticeable. A person’s cash will not be able to buy as much in one, 10 or 20 years into the future. A person might need to take more stock risk than planned. Finding the right investments can be challenging and best left up to a qualified and experienced investment advisor.

Stress testing your financial plan and adjusting your investment portfolio can help eliminate stress and ensure your investments keep up with rising costs.

Prepare for inflation

Your financial advisor or investment advisor can help prepare for inflation by:

• Helping adjust your budget to meet near-term financial goals and long-term retirement goals

• Stress testing your financial plan to help you stay on track to meet your retirement goals 

• Factoring inflation into your investment choices

• Rebalancing, diversifying or adding to your portfolio asset classes and investments that have historically fared well during periods of rising inflation

Inflation has a huge influence on our financial lives but should not be a retirement killer. Take the time to meet with financial experts Gregory Pierce or Kim Molitor who can help develop or update a financial plan to beat inflation and ensure you the ability to live well during your retirement years.