A soaring stock market, soaring inflation, up-and-down interest rates. What do we make of it all as 2021 comes to a close, and what does it mean for investors like you?
In September, the stock market had its first losing month since January. Since then, Wall Street has rebounded to new record highs, even though many of the issues that worried investors in September remain worrisome. How will it all play out in the final weeks of the year, and what can you do to prepare? Today I’ll cover: The reasons behind Wall Street’s recent roller-coaster ride; the inflation factor; best and worst-case scenarios for the rest of the year; and the smartest move you can make before New Year’s.
As I mentioned, September marked Wall Street’s first losing month since January. All three major indexes finished down around 5 percent for the month. But by late October, the Dow, S&P 500, and Nasdaq had all hit new record highs again. The rally continued into November, with the Dow topping 36-thousand for the first time ever on Election Day. The market cooled a bit the following week, but not much. So, what inspired all this optimism after September’s swoon? That’s a good question. The economic data that emerged in October was mixed, at best. Third quarter GDP growth came in at just 2 percent, a big drop from the over-6 percent growth achieved in the first and second quarters. Meanwhile, supply and labor shortages continued to fuel inflation, which hit 6-point-2 percent in October, the biggest year-to-year jump since 1990. What’s more, long-term interest rates continued to rise for most of the month, with the yield on the US 10-year-treasury hitting almost 1-point-7 percent on October 21st.
On the other hand, investors have also seen some hopeful signs. New coronavirus infections dropped nearly 60 percent in October, and several important economic indicators improved, including unemployment and consumer confidence. And after that early-autumn spike, long-term rates leveled off and started falling again. What’s more, at its November meeting, the Federal Reserve indicated it won’t start raising short-term rates again until it’s sure the time is right. The Fed also stressed again it will move cautiously with its plan to ween the economy off all the artificial stimulus it’s been getting since the coronavirus crisis started last March. All these factors have helped keep the stock market at or near record highs in recent weeks – but could the inflation factor dramatically change all that by year’s end?
That’s another good question because for most of the year, inflation has been just about the only thing capable of rattling Wall Street. Rising prices worry big investors because they know if they rise too high, consumers may reduce their spending, which in turn would reduce corporate profits. At the same time, they know inflation could also force the Fed to raise short-term interest rates sooner than planned. If that happens, could it also push up long-term rates and put a crimp in borrowing? And if spending and borrowing both drop, could that bring the whole recovery to a grinding halt? More good questions. However – the more urgent question for everyday investors is this: if prices keep going steadily up, will the stock market start going steadily down? Or, even worse, could more bad inflation news – or some other factor – trigger a fast selloff and a market correction of 10 to 15 percent?
Obviously, that would represent a worst-case scenario. But what about a best-case? Well, even though GDP growth fell dramatically in the third quarter, it’s expected to rebound in the fourth quarter to about 5 percent. If so, that would give the U.S. economy its strongest year of growth since 1984. Even better, many experts expect growth to continue in 2022 as the economy shifts from recovery to expansion. In a best-case scenario, big investors will focus on these forecasts and share the optimistic outlook. If that happens, we could see the stock market regain its recent record highs or even surpass them slightly. With the S&P 500 already up 26 percent, that would give Wall Street its third straight year of well-above average growth.
With all this in mind, here is the smartest financial move I believe you can make in the next few weeks: Look at your statements, look at the markets, then think back to March of 2020 when the stock market dropped by about 40 percent when the coronavirus first hit. Were you a nervous wreck? Did you think, “I don’t ever want to feel this way again,” and vow to lower your investment risk, only to forget about it once the markets recovered? If so, remember that feeling now and take action. If you’ve already shifted your strategic focus from growth to income, talk to your advisor about how you might modify your allocation to lower your risk a bit more. On the other hand, if you’re already investing for income and you realize you weren’t nervous during the coronavirus sell-off, you might want to talk to your advisor about getting more aggressive. The fact is, a 10- to 15- percent market drop could be a good buying opportunity for investors with the right risk tolerance using the right income-based stock strategies. Of course, if you’re within 10 years of retirement or already retired and haven’t yet shifted your investment focus from growth to income, I believe that is the smartest financial move you can make right now – and that can start with one simple phone call.
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. Arbor Financial Services of Florida, Inc. and Sound Income Strategies, LLC are not associated entities. Arbor Financial Services of Florida, Inc. is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities.