Partners' Network

Inflation, Recession and the Stock Market

Right now, inflation seems to be unchecked and has caught the Federal Reserve, economists and many others off guard. There is also talk of an impending recession as the “cure” for inflation. I will not add to either discussion but want to provide some comments.

The economy is complicated with many moving parts. We look at a falling stock market and think that is the “economy.” Likewise we look at interest rising rates including mortgage rates, bond prices dropping, decreasing personal saving rates and rising personal debt, company dividend policies and low interest on personal savings (which both seem to have remained steady), questionable price-earnings ratio stability, decreasing inventories and poor inventory management, supply chain disruptions, labor shortages, high employment rates (which is supposed to be good), currency fluctuations (going this way or that way), rising food, gas, auto, residential real estate and other prices causing inflation to increase, a major war causing unacceptable population displacements, loss of life, food and energy shortages, blockades, sanctions and dissipating costs, political upheaval and distrust of government policies, government inaction and a dearth of leadership, a confused Federal Reserve, rising government deficits and debt levels, uncertain tax and tariff policies, the continuing Covid threat, rising crime, random assaults and domestic terrorism, and systemic government destruction of our environment. Put together, there is a decrease in consumer confidence which is a major driver of our economy.

Now put all this in a blender 24/7 and recognize that it is also a global reality that is not restricted to the United States, and that is making it much harder to grab on to solutions.

It isn’t pretty, and things might get worse before they get better. However, if you have adequate cash reserves, a diversified stock portfolio, and have a long-term investment horizon, there should be no need to panic and sell precipitously as long as you feel there is basic strength in the economy and that this strength will be reflected in the prices of your broad-based stock portfolio over the next ten years.

Things run in cycles and, in a pretty free market, tend to offset and correct themselves. It has been like this, and in the absence of a political abrogation of our freedoms, it should be like this…eventually.

I am not trying to tell you what you should do. What I am trying to do is share some insights and perspective. Whatever you do, do not act out of panic and do not be impulsive. You can feel bad about the stock market drop but do not overreact. If you didn’t plan for bad times, now might not be the time to initiate some planning. Of course, if you have a short-term need for the funds, then that is a more serious issue, and you must devote significant effort to ensure you will be all right. Realistically assess your situation and your original planning and review it to see if you are still on track and if so, then sit tight. If not, then you need to relook at where you are. But whatever you do, do not act without having a thought-out plan.

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