Your Financial Future: Higher prices likely here to stay
This week, we are going to discuss how the current stock market correction compares to some past ones.
In March 2020 we had the pandemic quick crash. It is important to remember the U.S. economy is driven by about 67% consumer spending. Americans spend their cash and often are not shy about using borrowed money to buy things that they want. A trip through the local discount store always seems to have a bigger television or last year’s cellphone just does not take good enough photos.
As the pandemic began in China and started to spread across the world, no one knew how big it could get or how long it would last. There was a lot of general hope that everything would shut down for two or three weeks and then would just go away. Obviously, that did not happen.
It has taken 1 million lives in the United States and forced many businesses to close. Certain industries such as cruises, plays and other entertainment venues were closed for an extend period of time.
The government responded with unprecedented stimulus checks and benefits which flooded the economy with liquidity. People working from home had lower employment expenses since they did not have to drive to work, pay parking, eat lunch in restaurants and buy office attire. This added more available cash to the economy.
Large companies found ways to stay open while many small businesses were forced to shutter. People spent the money they would have used on restaurants or going out on home improvements and home exercise equipment to replace their trips to the gym.
We did not have a prolonged recession because of all the government intervention and the economy kept humming along.
On Monday March 9, 2020 the DOW suffered the most significant plunge in its history. There were two more record setting drops on March 12 and March 16. Some of these loses were over 2,000 points in one day. However, unlike most corrections, by the end of the year, all of the losses had been recovered. This correction was different from today’s because it was fueled more by short-term unknown questions. It was attached with the economic stimulus. These caused some reallocation but they were not a contraction to slow inflation.
The quick recovery may cause some people today to suffer more losses now because people think the situation will improve just as quickly.
But, today’s correction is different.
It is structural, caused by the excesses before and since the pandemic. All of the stimulus money has become very inflationary. Gasoline is at an all-time high. This will make people reconsider vacation plans and possibly hurt some businesses still recovering from the pandemic. Almost everything we buy has been delivered by truck and diesel fuel is even more expensive than gasoline. Real estate and auto prices are going up. These prices do not usually go back down as much. Wages have gone up significantly. Those will never go back so higher prices are here to stay. This is why we are experiencing 40-year high inflation rates.
As the Federal Reserve System raises interest rates, many more things will become more expensive. That is the reason the FED takes those actions. Taxes must go up at some point to cover all of the government’s debt. Over the last several years, the big tech stocks have been some of the biggest gainers in the stock market. There are a lot of similarities to the high tech DOT.com bubble that lasted from Sept. 1, 2000 until May 5, 2006. It was down 25 months and then took 42 months until full recovery. It was closely followed by the housing crisis and it took 12 years for the S&P to fully recover.
It is always important in financial planning to make sure that your risk profile matches the timeline for when you need access to your money. Money exposed to market risk has the highest long-term future, but it can suffer large losses in the short term.
Since no one knows how long each of those periods is, you must be prepared for all outcomes.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.