Wealth managers tackle the effects of inflation

As the Federal Reserve raised its key rate in mid-March and announced plans to raise it six more times in 2022, two local wealth managers shared what investors can expect from the market.

The Federal Open Market Committee (FOMC) raised the federal funds rate target by a quarter percentage point from 0.25% to 0.5% at its March 16 meeting for the first time in three years. and signaled six more rate hikes in 2022 in the interest of curbing inflation, which has hit a 40-year high 6.1% over the past yearreducing demand.

Jerome Powell, chairman of the board of the Federal Reserve, said the Fed is tightening monetary policy because “inflation remains well above our long-term target of 2%” while growth in the GPD , employment and the economy remain strong enough to withstand rising interest rates.

“While the invasion of Ukraine and related events pose a downside risk to the outlook for economic activity, FOMC participants continue to expect solid growth, as reflected in our summary of economic projections,” Powell said. at a press conference on March 16. “The median projection for real GDP growth is 2.8% this year, 2.2% next year and 2% in 2024. The labor market has continued to strengthen and is extremely tight over the of the first two months of the year. Employment rose by more than a million jobs in February and the unemployment rate hit a post-pandemic low of 3.8%, slightly below the median of committee participants’ estimates of its level. longer term normal.

He said demand remains strong as supply chain bottlenecks continue to limit how quickly production can respond.

“These supply disruptions have been larger and longer lasting than expected, exacerbated by waves of the virus here and abroad, and price pressures have spread to a wider range of goods and services” , did he declare. “Furthermore, rising energy prices are driving up headline inflation. The spike in crude oil and other commodity prices that resulted from Russia’s invasion of Ukraine will put additional upward pressure on near-term inflation here at home.

Powell said the Fed is looking to control prices now because high inflation will most certainly impose hardship on households in lower income brackets.

“We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” he said. “…With an appropriate firming of the monetary policy stance, we expect inflation to return to 2% as the labor market remains strong.”

The Fed does not expect its rate hikes to have quick effects, but expects inflation to fall to 4.3% this year, 2.7% next year and 2.3% in 2024, Powell said. He added that the Russian-Ukrainian conflict could change the situation, but the FOMC is monitoring the situation closely.

Steve Doorn. Courtesy Legacy Trust

Steve Doorn, senior vice president and director of portfolio management at Legacy Trust in Grand Rapids, said “a little inflation is not a bad thing,” and that the tightening of monetary policy in the Fed is usually a sign of economic strength.

“That means things have improved to the point where the Fed can start to scale back some of its accommodative policy. It’s strong enough to stand on its own two feet and doesn’t need the same level of support as he had at the start of the pandemic,” he said.

Doorn said that during the historically long economic expansion that began after the Great Recession and continued until the pandemic hit, people who don’t remember the high inflation of the 1970s and 1980s became conditioned to low inflation and therefore may feel more jittery than necessary. as prices go up.

“Some inflation allows companies to raise wages, which generally raises everyone’s standard of living,” he said. “Where you struggle is when you get persistent inflation in the range of 5%, 6%, 7%. Then it starts to erode people’s ability to spend, and one of the things we have to watch right now is the difference between the level of inflation and the level of wage growth.

On portfolio management, Doorn said investors should expect lower returns for bonds and fixed-income investments because bond prices move inversely to interest rates. He said he wouldn’t be surprised if the overall stock market valuation declines, but earnings growth in the still-healthy economy will likely be strong enough to offset the reduction in valuation.

“Despite the slow start to this year, (equities) could still have positive returns by the end of the year,” he said. “…We are coming off of three great years for the stock market, and valuations going forward this year were above average. When you are in a period of rising interest rates, you expect valuations to contract. We think a good year this year will be a stock return of between 5% and 10%.”

Nick Juhle. Courtesy of Greenleaf Trust

Nick Juhle, chief investment officer at Greenleaf Trust in Kalamazoo, said the Fed signaled this rate hike a long time ago and the market is taking notice. Indeed, shares rose 2% after Powell’s announcement.

He also said that no matter how the stock market performs, inflation is the main reason people should invest.

“You need to be able to outrun inflation over time, otherwise the money you earn and put under the mattress today won’t buy everything you need in retirement” , did he declare.

“Your options are that you could keep all your money in cash without risk… but your purchasing power will decrease over time, so the value of your dollars will decrease, which is why it is important to invest money in First and foremost, to have a portfolio that is invested based on your ability and willingness to take risk and that also aligns with your long-term financial goals. »

Juhle said he views stocks, or equities, as the “first line of defense against inflation.”

“If you look back, they have consistently outpaced inflation over time,” he said, in contrast to commodity returns such as gold, which tend to track the level of inflation instead of exceeding it.

He said he tells clients that it’s very difficult to predict what the stock market will do in any given 12-month period, so it’s best to look long-term and sit tight.

“You may have a flat year this year…but over a three-year, five-year, or ten-year period, the further you look, the more likely you are that stocks will be worth more over that period than they were when you started,” he said.

“(It’s) a great reason to keep putting money aside based on your goals and to stay disciplined and not use events like geopolitical conflicts and the like as a reason to get out of the market as a emotional reaction.”

He recommends investors seek advice from an advisor to ensure they have a diversified portfolio and the lowest possible fees and taxes to get the best returns.

Juhle said he hopes the Fed’s actions to curb inflation will mean people have more discretionary income to invest for their future.

Dolores W. Simon