DEAR CLIENTS:

Interest rates are going to go up, and they are going to go down. The stock market is going to go up, and it is going to go down. Inflation is going to go up, and it is going to go up, and it is going to go up.

I was taught that philosophy by one of my mentors when I began to work in investment services 35 years ago. At that time, I lacked the experience to know if it was true, but time has certainly proven its validity. While we are always on inflation watch, I began to comment and caution more strongly about it starting this past April. At that time, the general opinion of market analysts was that the spike would be transitory. So far, inflation has proven to be a bit stickier than was hoped for those few months ago.

Consumer prices rose in June, increasing as fast in a single month as they did in a year early in the pandemic—paving the way for the Federal Reserve to keep consistently raising interest rates as inflation shows few signs of slowing. The consumer-price index increased at a 9.1% annual pace last month, the highest rate since late 1981 and half a percentage point faster than May’s 8.6% increase. The CPI report all but solidifies the possibility that the Fed will raise interest rates by at least three-quarters of a point when central bank officials sit down for their next policy meeting at the end of the month. It has significantly heightened the chances of a full percentage-point increase. As we have built clients’ investment plans over the decades, factoring inflation into our projections has always been our policy. Even moderate inflation when applied to your assets over time will erode purchasing power and could cause you to have to curtail your lifestyle. Combating dwindling buying power is precisely why stocks and real estate, assets that typically appreciate, are part of financial plans we construct.

The cycle goes as follows: prices increase throughout the economy (inflation), the Federal Reserve raises interest rates to slow the economy down and stop costs from spiraling out of control. The dicey part of this attempt to keep inflation from escalating is raising rates in such a way that the economy cools off, but it is not slowed so much that it results in a recession. A period of rate increases does not always result in a recession, but it often does. Recessions and the market declines that typically precede them are certainly not pleasant, but they are a normal part of the economy. Periods of sustained growth will result in frothy asset prices. A downturn restores the balance and brings stock prices back to more realistic levels.

Turmoil in the markets causes negative emotions and fear, often leading investors to make decisions that seem rational in the moment, but that are destructive to their long-term financial wellbeing. Studies have shown that we humans respond much more strongly to losses than to gains—a tendency that drives many investors to bail out during market declines. When financial markets rise, money flows into the markets. When markets pull back, many investors cash out, a move that prevents any possible recovery and makes their losses permanent.

To avoid getting caught up in the greed/fear cycle that can have investors buying high and selling low, here are some strategies that can help in staying the course with your investment plan—

• Consider the number of shares you own of a particular security. The value of stocks and bonds is moving up and down every single day. Unless shares have been bought or sold in your account, that number should remain stable. If you are not selling shares, the current price does not matter and when prices go back up, your account value will too.
• Pay attention to the dividend income being paid within your accounts. Dividend paying stocks and bonds function much like having a tenant residing in a rental property. The price of the property can decline but the tenant continues to pay the rent. Unless you are selling the property, the current price is not that important. Prices of those stocks and bonds may fluctuate but typically, that income keeps flowing.
• If you are still working and accumulating wealth, counterintuitive as it seems, a bear market is your friend. You are getting a chance to buy securities when prices have pulled back and stocks and bonds are on sale. Every contribution to your retirement accounts buys you more shares than before the decline occurred.
• If you have been keeping more money than you need to have in your cash bucket for emergencies and opportunities because nothing has felt like a good buy, consider moving forward with getting some of those dollars to work. Even though the tendency is to feel protective of cash because you cannot experience any loss of capital, inflation is quietly (not so quiet right now with a 9% annualized number) eating away at your purchasing power.
• When markets get choppy, I am often asked what I am doing with my personal investments. What have I changed? How am I responding? I have not cashed out of any investments. I am one of the people I previously mentioned that has been keeping more cash than my plan indicates is necessary. Recently, when prices of bonds declined due to rate increases, I did use my excess cash to add to my municipal bond holdings.
• If you are receiving income from your accounts and have the ability and the desire to reduce your draws, let’s discuss that option. We will advise if that is a necessary step to keep your financial plan on track. Since we usually approach draw rates from your investments rather conservatively, it is often sustainable without any modification during down markets.
• Turn off the news. The media has an ulterior motive in keeping you nervous about the state of the markets. You are much more likely to continue to consume the news when you are mired in fear, so media of all types tends to focus on the negative.
• Call us. If you are feeling anxious about your investments, please reach out. We often have access to information and insights that can help you keep current events in perspective. We welcome your call.

So, when will this bear market we are experiencing end? The greatest investment minds both past and present all agree that it is impossible to predict but I expect volatility will continue as the Federal Reserve works on solving the current inflation surge. Your investments include outstanding and valuable companies that have weathered other economic storms. While the price of their shares may have recently declined, the value of those companies probably has not, and over time should recover. We remain focused on what we can control, which is the psychological key to survive and thrive as an investor.

Our upcoming webinar featuring Kent Chan, Equity Investment Director with Capitol Group, has been postponed. We are working on rescheduling the session for a date later in the summer. We will notify you as soon as we have the new date on the calendar.

Please stay safe. Enjoy the rest of the summer and stay cool out there!

All the best,

— Priscilla "Cilla" McKinley

President - Brent Forrest & Associates LLC

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