INFLATION, COVID, the FED, and the Fourth Quarter

Q&A with AFG’s Investment Research Team

Labor Day Weekend serves as an unofficial end of summer for many of us.  Students return to school, summer vacations are over, football season starts, and dusk comes noticeably earlier in the night.  Driven by this change, many people begin to plan for the year’s final quarter or even go so far as to see the fall as a starting point of a new ‘year.’

In that regard, I wanted to tap into Allegheny Financial Group’s Research Team to convey their thoughts to you on what they see with the current capital market environment.  The news tells us about Inflation spikes, Federal Reserve Meetings, markets reaching all-time highs, and why they matter to our family’s long-term financial planning.  But much of what you hear from media outlets relates to having people return to their broadcasts, not your personal financial picture.

Let’s take a listen to what the investment analysts of Allegheny Financial Group have to say.

What is the difference between the economy and the stock market, and why does distinguishing between the two matter?

Jack Kraus, CFA and Allegheny Chief Investment Officer

“The economy is the accumulation of all of the production and consumption of goods and services. We generally think of public businesses, and that is the link to the stock market. The stock market is the value of publicly traded companies. However, public companies only comprise about 1% of all U.S. companies and employ about one-third of the total employees in the non-farm business sector. Therefore, the economy is much bigger than the companies that are traded in the stock market. The results of the stock market make up one of the ten leading economic indicators used by economists to judge the overall direction of the stock market.”

Joe Clark, CFA

“Think of the economy as slow-moving (like a barge or cruise ship) and the stock market as fast-moving, reacting to many short-term data points (like a speed boat). I wrote a blog post about the two with an analogy of walking a dog. We receive information impacting the stock market daily; on the economy, we only get four GDP (gross domestic product) points per year, so very different from a time horizon perspective.

Is the economy in good shape right now?  Is the Stock market in good shape?  How should this impact an investor’s decision making as we get towards the final months of 2021.

Jack Kraus, CFA

“The overall economy is in good shape. Consumption by U.S. consumers makes up about two-thirds of our economic activity, and consumers generally have money to spend. This makes the companies in the stock market healthy but does not necessarily make the stock market healthy. The market is forward-looking and is looking at 2022 and 2023, not today. Investors should never make investment decisions based on short-term outlook or feeling but develop a strategy for the long-term and adhere to it.”

Joe Clark, CFA

I would say both are in good shape. The S&P is up over 21% this year despite news throughout the year that one would think to cause a sell-off. We have yet to see a 5% drawdown and 53 record closes in 2021. And, the economy is fairing the same. After a huge COVID-19 drawdown in 2020Q2, the economy has grown 5%+ in the four quarters since, including the 30%+ initial recovery.

Inflation is all over the news this year.  How should an investor consider inflation with regard to their portfolio right now?

Nick Lewandowski, CFA

“At this time, it is still unclear whether elevated inflation will persist, and to what extent. For investors who have a significant portion of their portfolios invested in equities, modestly higher inflation should not be much of a concern. Companies generally have some ability to pass cost increases to customers via higher prices.”

Jim Rambo, CFA

“It’s the equity portion of the portfolio’s job to hedge inflation.  And the bond portion’s job is to not be equity.  So, I would stick with a strategic allocation.”

The Federal Reserve plays a prominent role in people’s view of the market.  Why?  How should an investor react to news from Federal Reserve meetings?

Joe Clark, CFA

“I’d say there are two reasons why the Fed plays a prominent role in investors’ views. First, the Fed has been a catalyst for many recessions, mainly from raising rates too aggressively. Second, their loose policies have been a large part of the stock market’s rally over at least the past 12 or so years. They were the main factor establishing a bottom last March and why we have seen nothing but market rallies since.

As boring as it sounds, investors should do nothing with news from Fed meetings. At 2:00 pm on Fed meeting days, their updates are released, and at that point, it is already too late to capitalize on initial news. The best way to invest is to “not fight the Fed.” Don’t make major portfolio changes that go against the Fed’s outlook or react to each member’s view.”

Knowledgeable investors know that they face many risks.  If you had to counsel an investor on one risk right now, what would it be, and what counsel would you give them?

Jack Kraus, CFA

“The biggest risk is the lack of income in the investment world. Short-term rates are near zero, which cripples money markets, savings accounts, certificate of deposits, and short-term bond. The 10-year Treasury is currently yielding 1.3%. Corporate bonds are generally yielding 2 to 4%. The overall stock market has a yield of under 2%. The risk is if you rely on income produced from your portfolio to dictate your spending amount. Usually, in these cases, investors seek out higher-yielding investments, which are generally risker in nature. We suggest investing on a total return basis and living on a reasonable withdraw rate from your overall portfolio.”

Nick Lewandowski, CFA

“The most significant risk most investors face is not having a plan. Many investment strategies work over time if implemented in a disciplined fashion. However, what generally does not work is bouncing back and forth between strategies based on the news of the day. “

Joe Clark, CFA

“Market corrections are normal and healthy. We had a quick, sharp bear market last year, but since then the market has traded up, with many areas doubling in that time. Just like the market during the COVID-19 drawdown was unusual, this market is as well. We typically see corrections (10%+ drawdown), but we have not even seen a 5% drawdown this year. We are getting more 1% up days than down days. Clients must be prepared for corrections and not overreact when they do happen. Corrections should be viewed as a buying opportunity that better aligns you for long-term success—not when you panic sell and go back to the drawing board on your allocation.

With perspective for where the economy and market stand right now, what is the best advice you could provide for people nearing retirement in the next few years?  And for people who are new to investing?

Jack Kraus, CFA

“For all investors, you must look at your true time horizon. If I retire in two years, that is not my time horizon; my true time horizon is my life expectancy. Therefore, investors near or in retirement generally still have long time horizons. Younger investors need to realize that the money they save and invest while they are young will have a much bigger impact on their portfolio in the future than the money they save closer to retirement. Sometimes, this is hard to envision because retirement is so far away, and there are so many things your money needs to do today. My best advice is to save what you can and increase it every year until you are saving at least 10% of your gross income.”

Jim Rambo, CFA

“For those who are new to investing, make a plan and stick to it. Taking more equity risk can be beneficial if it is in the right areas but investing in any equities is what is important. I would find a global equity fund and start on a monthly/quarterly schedule to make investments. This will help you to understand the markets better. Some of the months you buy, the fund will be higher than the month before, and other months it will be lower. This can help with hands-on experience of market cycles. And when there are more assets to invest, it can help you set long-term expectations in a diversified portfolio.”

An Allegheny Financial Group financial advisor is fortunate to be able to tap into the perspectives of this special team at any time. As we have been reminded over the past year and a half, the capital market environment is volatile in the short-term, but having a strategically planned and diversified portfolio with exposure to all area of the market can set investors up for success in the long term. If you want to further this discussion, please visit us at www.alleghenyfinancial.com to be put in touch with a member of our advisory teams.

Author: David Jeter, CFP® | Partner and Financial Advisor | Allegheny Financial Group | September 2021

The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.