How Inflation and Current Stock Market Volatility Are Affecting You

Welcome to Select’s new advice column, Get your money right. Once a month, Financial Advisor Kristin O’Keeffe Merrick will answer your pressing financial questions. (You can read his first episode here on what to do with your excess cash.) Do you have a question? Send us a note at [email protected].

Dear Kristin,

I’m doing my best to understand this economy right now. Some say inflation is bad, others say it’s normal. I just don’t understand how this all relates to the stock market. What do you think will happen this year?

Good year,

Invest in Indiana

Dear III,

I thought your question was a perfect way to start the new year. There is so much information out there, too many “experts” and not enough clear and concise commentary to explain the current state of the world. I will try to provide that below. Hope this helps. Please remember that this is my opinion only and not that of my company or my broker.

First, in case you need a reminder, let’s define inflation: the increase in the prices of goods and services over a period of time. We have to remember that we haven’t had serious inflation for a very long time. In fact, millennials have never been adults during a period of inflation, so this phenomenon is new to a whole generation of people.

At the macro level, inflation is usually a sign that the economy is starting to warm up. This isn’t necessarily a bad thing for the economy, but because it impacts people on a daily basis, we’re all noticing it more through things like rising gas and food prices. We are seeing widespread inflation – in terms of higher energy prices, wages and higher transport costs – and because we are in a global economy this is impacting the global supply chain at all levels and has a material impact on all sectors.

Recently, the Federal Reserve announced its plan to fight inflation. If you recall, the agency sprang into action at the onset of the Covid-19 pandemic in the spring of 2020 and did, in my view, a good job of trying to stabilize a very fragile economy in a time of great uncertainty. It pumped money into the system by increasing its bond-buying program and, at the same time, kept interest rates incredibly low. As a result, we were able to avert disaster.

As we progress from the early days of the pandemic, the economy has proven to be resilient. With government programs in place to send financial support to small businesses and nonprofits through initiatives like the Paycheck Protection Program and Direct Payments to Americans through Extended Unemployment Benefits, we have actually started to see the economy grow. Stock markets reversed course and started to soar again – hello double-digit returns! – and jobs have been easier to find.

Over the past year, we have begun to feel the impact of the pandemic in ways most had not anticipated. Supply chains are essentially broken. The workforce is remarkably small and it is very difficult to fill positions. December jobs data showed us that the unemployment rate is 3.9%, while at the same time people are quitting their jobs in droves.

Employment data for November said 4.5 million people left their jobs, including one million in the restaurant and hospitality sector. Wages are going up because it’s so hard to hire people, which, in turn, has been a huge driver of inflation overall. So even if you take home more money from your salary, it also means that the extra money goes towards your cost of living.

That said, never fear, the Federal Reserve is here to help. Many believe the Fed miscalculated this whole inflation move by calling it transitory inflation – meaning the situation would sort itself out. However, in the last six months there has been a significant change in the way he deals with this situation. According to Goldman Sachs, we will see four rate increases in 2022 as well as a significant reduction in the bond buying program. Meanwhile, JPMorgan Chase & Co. predicts there could be more than four rate hikes this year.

Is it sufficient? I’m not sure yet. I know it will take time for the actions of the Federal Reserve to trickle down to the economy. In the meantime, however, there is still context for a robust year in the stock market as companies continue to sit on piles of cash and are still able to borrow at very low rates. As a result, families and individuals have jobs and wages rise. In addition, personal savings rates have reached unprecedented levels.

In a Jan. 10, 2022 interview, Jamie Dimon, CEO of JPMorgan Chase & Co., seemed to agree, saying “consumer balance sheets have never been in better shape.” Dimon also says he expects exceptional growth in 2022, but foresees higher levels of volatility. This means that the stock market will not go up all of a sudden as we have seen over the past two years, but on the contrary, we will be subject to many more ebbs and flows. This has happened before in 2022, when the S&P 500 index at one point fell more than 10% from its January 3 peak.

To be clear, these are not signs of a depressed economy. So what to do with our money in 2022? I think there are opportunities in sectors such as disruptive technologies, clean and renewable energy and electric cars and their underlying lithium and battery components. I also think we could see a dividend hike stocks (i.e. blue chips). Although this is a sector that has been largely ignored – the focus has instead been on large cap growth stocks – with the inevitable rise in interest rates, I think flashy tech stocks will continue to suffer as many investors take advantage of these positions and start looking for yield again.

Another detail worth mentioning is that your investment choices should be made with a long-term perspective. Although the market got off to a shaky start in 2022, that doesn’t mean it should impact your investment strategy. It’s also worth noting that we’ve reached many new “all-time highs” in the stock market over the past few months, so while it’s not nice to see a sell-off, it’s completely normal and expected, especially considering the fact that we have had very few setbacks over the past two years.

Finally, keep in mind that you are not able to time the markets. And please don’t be offended, but it is not possible for you to determine or predict market volatility. Therefore, I always suggest deploying a specific amount of money in the markets each month to take the guesswork out of your decision making. And for the cash you have in reserve, consider putting it into a high-yield savings account. Although APYs are currently small, the money you could earn is more than what you would get from a traditional savings or checking account.

Make sure your portfolio reflects your opinions and conscience and is diverse, but not overly diverse. As always, I remind you that the key to a strong portfolio is a diversified asset mix that reflects your risk tolerance. If you’re new to investing, consider a robo-advisor, which will build a diversified portfolio for you based on your risk tolerance, time horizon and investment goals. Additionally, robo-advisors automatically rebalance your investments over time based on market conditions and how close you are to your investment goals.

This year, I will continue to listen to the Federal Reserve for future clues, invest in companies and sectors that I believe present explosive opportunities for revenue and growth, and continue to invest on a monthly basis, because I know this is the best way to work towards a goal of wealth creation.

Kristin O’Keeffe Merrick is a financial advisor and financial expert at her family business, O’Keeffe Financial Partners, located in Fairfield, NJ.

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