May 15, 2023

Social Security just tipped us off to what the Fed actually thinks about inflation: 5 Key Strategies for Financial Success

The recent release of the Consumer Price Index (CPI) report has sent shockwaves through the financial landscape, revealing a concerning inflation rate of 4.9%. Concurrently, industry experts and Social Security advocate groups estimate a meager 3.1%Cost of Living Adjustment (COLA) increase in 2024, a significant drop from the robust 8.7% increase seen in 2023. To add to the worries, an inverted bond yield curve, a reliable indicator of market turmoil, has persisted for months.

In these uncertain times, it's crucial to address these concerns head-on and implement strategies for financial stability, so read on for key insights into markets and some straightforward actionable steps you can take today!

    I’ve worked with hundreds of people in the journey to and through retirement and the one thing I’ve seen work across the board: consistent money habits lead to predictable financial outcomes.

1. Understand Inflation's Impact

Inflation can wreak havoc on personal finances, eroding the purchasing power of your hard-earned money. High inflation over the last 2 years along with the recent CPI report's 4.9% inflation rate underscores the still relevant need for proactive financial planning. While the source of this inflation may seem ephemeral, this recent Wall Street Journal article makes a strong case about why we see continued inflation now that supply chains have stabilized and wage growth and rent increases have slowed.

What you spend money on dictates your individual inflation experience – homeowners who secured low rates in ’20 enjoy lower inflation than renters, for example. By understanding your personal expenses most impacted by broader inflation you can deploy more judicious spending disciplines to counter its effects, protecting your savings and maintaining your standard of living.

In the world of investing, stocks are the commonly prescribed medicine to keep pace with (or outpace) inflation – but what should investors do if markets are more tumultuous and unpredictable than normal?

2. High Inflation = Higher Interest Rates…until?

Let’s take a look at the Federal Funds rate from 1985-today:

Fed Funds Rate Jan 1985 - Apr 2023
Source: St. Louis Fed, Fed Funds Rate Jan 1985 - Apr 2023

From our perspective at Green Ocean, the projected 3.1%Social Security COLA increase for 2024 is another data point (along with the bond yield curve, more on that in a second) that says what the Fed won’t – high inflation and high interest rates will likely not last long into 2024.While this is good news for the long-term, in the short-term the transition from high rates to low usually goes hand-in-hand with economic recession – illustrated in the gray bars in the chart above. In fact, the trend of high rates leading to ‘hard landing’ stock markets are quite clear over the last 4 decades.

With these data points showing clear direction, we believe the timeline for taking action is clarifying.

3. The Best Offence is a Good Defense

Amidst inflation concerns and market uncertainties, having a robust emergency fund is the first step. A well-funded emergency fund provides a safety net during unexpected events and economic downturns. By setting aside a portion of your income and consistently contributing to your emergency fund, you can enhance your financial resilience and navigate challenging times with greater peace of mind.

Assess your budget, identify areas where you can cut unnecessary expenses, and redirect those funds towards savings, debt repayment, and investment opportunities. Investors should be working to capture historically high interest rates in anticipation of expected interest rate droughts in the future – if you can afford to save more, now is the time to do so.

Creating a cash cushion destined for investment into the stock market (risk and time tolerance allowing) via portfolio rebalancing and dollar-cost-averaging during market downturns is a time-tested successful strategy for investors.

4. Mentally and Emotionally Prepare to Invest into Market Turmoil

This isn’t the stock and bond market of baby boomer’s peak family and career growth years (the 80’s & 90’s), when investors had the choice between high fixed income rates and even higher stock market returns. The persistent inversion of the bond yield curve serves as a warning sign of potential stock market turmoil on the horizon as well as lower interest rates. To safeguard your investments, it's vital to reassess your portfolio and adopt prudent investment strategies for the present while keeping the door open to opportunity that presents itself in the future.

Key Interest Rates w Highlighted Inversions
Source: Charles Schwab Research, Key Rates 5/10/2023

The red arrows in the chart above indicate what are referred to as yield curve inversions – in other words, yields for bonds maturing at the end of ’23 and after Q1 ’24 are actually paying less than current prevailing Fed interest rates.

What does this mean for you? First, recognize that the global bond market is more than 3 times the size of the global stock market. In order for the yield curve to become inverted, billions if not trillions of dollars must be flowing to bonds in these timeframes. The only entities that can move that kind of capital are large companies and governments – the elephants are stampeding to stable investments in these timeframes and investors would do well to heed their direction.

5. Small Steps can Lead to big Results

Equipped with well-considered market insights, the right mindset, and the right investment choices, you can proactively safeguard your financial stability and seize opportunity.

Implementing key strategies such as diversification, thoughtful asset allocation, and periodic portfolio rebalancing is essential to navigate market volatility and minimize potential risks. Consider capitalizing on opportunities by strategically deploying cash reserves during market downturns using a dollar-cost averaging approach, which offers the potential for above-average returns. Additionally, prioritizing the liquidity of your funds by avoiding investments with limited accessibility or time-bound securities like CD’s with long maturities is of utmost importance. By taking these proactive steps, you can optimize your financial position and increase your chances of long-term success.

5b. Seeking Professional Guidance

Addressing these concerns and implementing effective strategies may feel overwhelming, but you don't have to face them alone. Seeking the assistance of a financial advisor can provide invaluable insights tailored to your specific circumstances. A qualified professional can help you understand the intricacies of inflation, create appropriate investment strategies, simplify financial complexities, and develop a comprehensive financial plan that aligns with your goals and risk tolerance.

In a world of Fed maneuvers, stubborn inflation, disappointing Social Security guidance, and a queasy bond yield curve, it's time to seize the moment and emerge stronger than ever before. Don't sit on the sidelines, take charge and implement these strategies today to pave your path towards a fortified financial tomorrow.

I’d love to hear about your reactions to the headlines and learn more about your plans for what is to come. Schedule a consultation with me today, and together we'll navigate these uncertain times and build a solid foundation for your financial future.