The news points to a possible recession in the markets and the economy, but long-term investors can overcome this with a little luck and a lot of planning.
In this report, published by the American newspaper "The New York Times", writer Jeff Sommer says that the news that has been circulating for months about the rate of inflation has worsened recently.
The US government said last Wednesday that the consumer price index increased by 9.1%, which is considered the fastest rate since November 1981, but this bad news increases pressure on the Federal Reserve, which seeks to control inflation and put it under control by trying to raise interest rates short. The term and sale of financial bonds amounting to 8.9 trillion dollars in the general budget.
The writer believes that all these tools are useless, because they reduce the severity of inflation, while increasing the slow pace of the economy, which increases the chances of the United States suffering from recession.
Indeed, some of these fears are justified, and to these problems the current coronavirus, the Russian war in Ukraine and the increase in global energy prices are a recipe for an economic crisis, to say the least.
Millions of people will suffer painful experiences if this slowdown reaches the worst level that can be classified as a recession, but if one is fortunate enough to have the financial resources to invest in stocks or bonds, the coming months may be difficult for him, but he can overcome it with a little planning.
The writer stresses that he is trying to help readers who ask for advice, but he admits that no one knows where the markets or the economy will lead in the short term.
vague expectations
The future of the economy is not clear. Estimates are currently circulating on guesswork. Long-term investors may be better off ignoring the news, because even careful studies of economic and financial data do not provide useful guidance.
stock market situation
The writer indicates that the future of the stock, bond and commodity markets is also vague and unclear, and while stocks and bonds have been damaged this year, the value of commodities such as oil, wheat and copper has risen, with some exceptions, of course, and the value of shares has not decreased much recently, while bond prices have risen And the price of oil has fallen from what was recorded recently.
The Fed's predicament
The Federal Reserve is in a difficult position, and the St. Louis Federal Reserve says that “the bank has been given a dual mandate to pursue the economic goals of maximizing job creation and price stability,” which are now contested goals, and price stability has become the major problem. faced by the Bank, while the recent report on inflation makes an increase in interest rates inevitable.
The unemployment rate in the United States in June was 3.6%, which is not far from the lowest level recorded in decades, but with the increasing economic growth it is expected that more people will join the labor force, however, this is unlikely for the time being .
The Federal Reserve has begun tightening financial conditions to reduce the increasing demand for goods and services that helped increase inflation, and financial markets expect interest rates to continue to rise, reaching 3.57% during the first quarter of next year.
At this point the Fed may have to start cutting rates, and one possibility is that inflation will then appear to moderate, so the Fed can refocus on securing as many jobs as possible.
However, it is also likely that the Fed will not be able to rein in inflation without causing a recession, and it is also conceivable that inflation will decline significantly on its own as the supply chain problems caused by the Corona virus fade and the war subsides, making additional increases in Interest rates are unnecessarily punitive for workers. Oil prices have recently fallen and gas prices have followed, although they are still high.
What is clear is that the Fed has no real choice, inflation is a hot political issue and the Fed should be seen as working to control it even though its moves undoubtedly increase the risk of a recession.
What do the markets say?
The writer says that what the economist Paul Samuelson wrote in Newsweek magazine in 1966 is still largely true, "Wall Street indicators have predicted 9 of the past five recessions," as the S&P 500 predicted. ) with 7 recessions out of 16 cases, and the indicator predicts slow growth, but it does not expect a recession yet.
What can we do?
The writer stresses the importance of ensuring that you are able to pay bills and have sufficient cash for emergencies, and urges that the funds be kept in a safe place, preferably in a place that provides a small return. Reasonable options include high-yield bank accounts, money market funds, treasury bills, and bonds.
For investors, it is a good idea to put money in low-cost, diversified index funds that track the entire stock market, as well as diversified bond index funds with age, and for people with shorter horizons the situation is more difficult because they may need to make some swaps.
If the economy slips into a long and deep recession, the stock market may take a hit and not recover for some time, and preparing for this event may mean reducing the allocation of shares if funds need to be used soon, and although the bonds have not performed well recently, high quality bonds are more They are generally safer than stocks, which is why they are suitable for minimizing risks, and accordingly the writer urges those who want to invest to look for a mix of diversified stock and bond funds that suits them.