The ongoing market volatility has created some overwhelming headlines. It’s a good time to take a step back and remember, your portfolio is not broken. Taking a look at historical data, here are two important observations:
First - There have been periods like this in the past (the last 125 years). But they are extremely rare and have never lasted for more than nine months. Based on history, it’s reasonable to expect that the current episode, defined by everything going down at the same moment, is nearing its end.
Second - The factor that’s driven the current unpleasantness, has been rapidly rising interest rates. Back on March 9, 2020, interest rates stood at just 0.499% (for the 10-year Treasury bond). Today, interest rates are at 3.68%. Interest rates rose by 3.18% in absolute terms. It’s also important to focus on the proportionate change, in other words, interest rates rose by 637% proportionately. This was a big deal. Just how big? Well, we haven’t seen anything this extreme since about 1850.¹ Thankfully the large proportionate rise is over. Are interest rates likely to continue to rise in the long run? Yes. But expect a slow and gradual fashion.
Anyone who has bought a gallon of milk or a gallon of gas in the past six months has felt the sting of inflation. Here are three things you need to know to stay a step ahead:
Strap in: The good news? Economists think that inflation may have peaked. The bad news? This isn’t a problem that’s going to go away quickly. In fact, it could last years, not months.
Experts believe inflation will decrease over the next two years if the war in Ukraine ends and the pandemic continues to slow down, but our budgets need to be prepared for the sting of higher prices for the foreseeable future.
Interest rates: The Federal Reserve has continued to increase interest rates, making it more expensive to borrow money.
This means it will cost more to buy a car or a house or expand a business. The Fed’s intent is for price gains to moderate, but the unintended consequence could be a rise in unemployment.
Taxes: Washington passed the Inflation Reduction Act of 2022. It includes an array of provisions aimed to help people and businesses. One provision boosted funding to the IRS by $80 billion over the next 10 years to strengthen enforcement and close a $600 billion tax gap.²
The result will be more audits targeting high-net-worth individuals and large businesses. If you’re a household making more than $400,000 or if you own a business, you could face an audit.
Now is a time to take a deep breath and remember what investing is all about. We’re focused on both you and your long-term goals. If you need some reassurance, or if you have any questions about this email, simply click the button below to schedule a call.
1 Global Financial Data, Inc. 2 www.irs.gov All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.