Financial Planning

How to Get Started with Environmental, Social and Governance (ESG) Investing

How to Get Started with Environmental, Social and Governance (ESG) Investing

As of 2022, there were $8.4 trillion in sustainable investing assets. Investors from all walks of life leverage sustainable investments as part of their wealth management plan. If you’re someone whose life decisions are often driven by how your choices impact the environment, your community, and society as a whole, it’s time to look into ESG investments. Environmental, social, and governance (ESG) investments consider how the companies you invest in help safeguard the environment and community—helping you earn money and build a more ethical portfolio.

Plus, a company’s commitment to environmental, social, and corporate governance can also positively impact its performance, offering lucrative opportunities for investors. Here’s how you can get started with ESG investing as part of your investment management strategy.

 

What is Environmental, Social and Governance Investing (ESG) Investing?

 

ESG investing is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact. Environmental, social and governance factors (ESG) are used to evaluate a company or investment’s sustainability.

  1. Environmental Factors such as:
  • Carbon footprint
  • Air and water pollution
  • Deforestation
  • Green energy initiatives
  • Waste management
  • Water usage
  1. Social Factors such as:
  • Employee gender and diversity
  • Data security measures
  • Commitment to customer satisfaction
  • Sexual harassment policies
  • Human rights
  1. Governance such as:
  • Board diversity
  • Political contributions
  • Level of executive pay
  • Large-scale lawsuits against the company
  • Internal corruption cases
  • Lobbying practices

Investors use ESG scores ranging from 0 to 100 to measure the sustainability of an investment. Scores below 50 are poor, while scores over 70 are highly desirable.

 

Benefits of ESG Investments

 

Building a sustainable investment portfolio can help increase your potential for high returns. According to the Morgan Stanley Institute for Sustainable Investing, the returns of sustainable mutual and exchange-traded funds were similar to traditional funds and, in some cases, actually outperformed traditional investments between 2004 and 2018. Also, the JUST U.S. Large Cap Diversified Index (JULCD) has returned 15.94% since its inception on an annualized basis compared with the Russell 1000’s 14.76% return. 

Morgan Stanley also noted that sustainable funds showed a lower downside risk than traditional funds. Even during turbulent markets when traditional funds showed more significant downside deviation with a higher potential for loss, sustainable funds experienced a 20% smaller downside. Morningstar, an investment research company, also found that in the first quarter of 2020, 25 of 26 sustainable index funds outperformed comparable traditional funds despite the pandemic.

 

What Types of ESG Investments are Available?

 

Although there are several ESG investment options available for your financial planning strategy, the two most common options include:

  1. ESG stocks: Although investing in a single stock type isn’t the best strategy, finding a few individual ESG stocks offers an opportunity to gain from their performance over time.
  2. ESG mutual funds: Almost 600 open-end and exchange-traded ESG funds are available. Mutual funds create instant diversification, and with ESF mutual funds, you can create a more personalized portfolio, so your investment will have the most impact on the issues you care about.

When considering ESG investments, reviewing the prospectus and considering the company’s ESG score are both equally important.

Plus, ESG investments can be broken down by an even more detailed scoring systems, which make it easier to focus on investments that mean the most to you.

  1. Issue-specific ESG scores measuring performance based on a single issue.
  2. Category-specific ESG scores based on either environmental or social or governance issues.
  3. General ESG scores focused on all three categories.

Consult with your financial advisor to find the best investments for your portfolio.

If you want to explore the possibilities of adding ESG investments into your financial planning strategy, speak to the experts at Platt Wealth Management today. We can help align your investment choices with your environmental, social, and governance values today.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How Long Will $1M Last in Retirement?

How Long Will $1M Last in Retirement?

Back in the day, $1 million dollars used to sound like enough to retire on. In fact, over time, this number became a popularized ideal in mainstream culture as the target number to hit.  While targeting $1 million to retire comfortably might sound like enough for some folks who have a healthy social security benefit or pension plan, chances are you’ll need more than $1 million to maintain or enhance your lifestyle. Many factors determine just how far that $1 million could get you in retirement, so let’s break it down.

 

Where You Live 

The cost of living in each state has a major influence on how long your $1 million will last. For example, your savings would last over 25 years in Mississippi while you barely make it past the 10-year mark in Hawaii. Looking at cost of living and state income taxes are two factors that can affect how far your money will go.

How Long You Live and Your Lifestyle

Although life expectancy in the U.S. is the shortest it’s been in two decades, it’s hard to say exactly how long you will live. If you live well beyond the average 76.4 years, your $1 million likely won’t be enough. Of course, the more extravagant your lifestyle, the more you’ll need to accumulate in your working years. Luckily, you can control your spending, which means with a little smart financial planning, you can help extend your $1 million. But, stretching techniques can only get you so far, which is why we always champion investing early and often. The sooner you begin, the less aggressively you’ll have to save as you near closer to retirement.

Your Health and Long-term Care

Of course, your health also impacts your retirement savings. In 2022, the average 65-year-old couple faced $315,000 in healthcare costs during retirement. Although Medicare should cover these costs, there are still medical expenses you will have to pay out of your own pocket. For example, long-term care expenses, which can cost over $100k annually, are not covered by Medicare.

An unexpected stay can really eat into your retirement savings. The healthier your lifestyle, the less risk there is for health issues, but again, longer life means you might outlive your savings.

Social Security and Pensions

Your $1 million is designed to supplement social security and pension incomes, which of course means you’ll want to have an idea of the benefit amount (approximately) you will receive. Factor that estimate in with any pension plans you may have and that can serve as a foundation for calculating your retirement need.

Your Asset Mix and Investment Risks

How you invest your $1 million is critical for retirement wealth management. Cash, for example, won’t do much to improve your wealth, while having a strategic asset mix will help you avoid the impact of inflation and reduce risks. Depending on real estate is also not the best financial planning strategy, as it lacks the liquidity required to cover expenses. If you take too aggressive an approach when investing, you increase the risk of losses, while playing it too safe won’t earn you enough.

The Rate of Inflation

The past year shows how inflation can impact your budget: If inflation rates are high, your money will disappear quickly as you’ll withdraw more money to cover your living expenses.

With so many ifs, you need a solid retirement strategy to help build your wealth. A financial advisor can determine how much you’ll need to retire comfortably and assist with a wealth management strategy. They’ll consider your social security and pension incomes, expenses, debt, and preferred lifestyle to target the amount you’ll need to overcome cash shortfalls and retire with financial stability.

To help you find the magic number for your retirement savings, set up a free consultation with the experts at Platt Wealth Management. It’s your life. We’re just here to optimize it.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Does the SECURE 2.0 Act Make 529s More Attractive?

Does the SECURE 2.0 Act Make 529s More Attractive?

Many of your have heard of the popular 529 savings plans that custodians can set up to fund their child or grandchild’s college education. Earlier this year, you likely also heard about the SECURE 2.0 Act which brought down some of the biggest changes to retirement and savings plans in recent years. But what does college planning have to do with retirement planning and how could the new legislation make 529s even more attractive than they were before?

 

Breaking Down the Benefits of SECURE 2.0 to 529s

 

But what does the SECURE Act 2.0 have to do with these 529s, you ask? Well, it broadens the definition of “qualified education expenses” and enhances the flexibility of these plans.

 

Thanks to SECURE 2.0, 529s now cover costs related to apprenticeships, and — here’s the big kicker — student loan repayments. Yes, you heard it right! You can now use the 529 plan to repay up to $10,000 in student loans. This new feature alone could make 529s far more appealing to many families.

 

Additionally, under SECURE 2.0, if your child gets a scholarship, you can now withdraw the amount of the scholarship without the usual 10% penalty. That means more flexibility to adapt to life’s surprises.

 

Balancing the Pros and Cons of 529 Plans

 

Now, does this make 529s more attractive? It’s not a simple “yes” or “no.” While these changes certainly sweeten the deal, they don’t fundamentally alter the nature of 529s.

529s remain an investment tool best suited for those quite certain about their children’s path to higher education. If your family’s situation matches this description, the expanded benefits under the SECURE 2.0 Act could indeed make the 529 plan more attractive.

 

However, if there’s considerable uncertainty about your child’s educational future, or if your family might not be able to take advantage of the new benefits (like the ability to pay off student loans), the enhanced 529 might not seem much more attractive than before.

 

The Risk? The Tax Costs of Overfunding a 529

 

The reason that we say 529s are an investment tool best suited for those “quite certain about their children’s path to higher education” is because a new J.P. Morgan study found that a 529 account is still the most tax-efficient way to save for a student’s education—but only if that account is actually used and depleted by the time the student completes their education.

 

That’s because removing the funds from the 529 for non-qualified expenses triggers a tax event. If the beneficiary does not go to school or does not finish school, the custodian has two choices:

 

  • Take back the money in the 529 account or give it to the student. However, in both cases, taxes and a 10% penalty must be paid on the earnings at the recipient’s ordinary income tax rate. If the student is in a lower tax bracket, it makes most sense for the student to receive the funds and pay taxes at the lower ordinary income rate.
  • Pass the account on to a lower generation (e.g., grandchildren). But there would be a tax liability for this option as well. The initial beneficiary might have to use some of the $12.92 million gift tax exclusion when a new beneficiary is named.

 

In other words, if you aren’t sure your child will attend college or may not complete a full four years, you’ll want to look at other options to avoid these tax implications. Other options include a pay-as-you-go approach, funding UTMA accounts, or setting up grantor trusts.

 

Choosing the Most Impactful Path

 

The SECURE 2.0 Act has brought some considerable enhancements to the 529 college savings plans, making them potentially more attractive to many families. However, whether these changes tip the scales in favor of a 529 plan for you and your family will largely depend on your specific situation and needs. A 529 account is the most tax-efficient education savings alternative, but only if the account is exhausted when the student’s education is completed.

 

As always, remember that financial planning is a personal journey. It’s essential to consult with a professional advisor who understands your financial goals and circumstances. If you’d like to discuss these changes and see how they impact your current financial strategy, don’t hesitate to get in touch!

 

At Platt Wealth Management, our team of financial advisors are ready to understand your goals and dreams in order to present the right solutions to your needs and opportunities that will simplify your financial life. We would love to learn more about you with a complimentary Discovery Call. Contact us today to discuss your opportunities.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Your Ultimate Guide to Dividend Investing

Your Ultimate Guide to Dividend Investing

The best any expert can say about the stock market right now is that future returns will be uncertain, and volatility may be the new normal. Although there are slivers of light shining on some parts of the economy, many storm clouds darken the near to intermediate-term outlook on the stock market.

 

Make no mistake; this is not a gloom and doom stock forecast. Quite the contrary, investors should maintain a cautious optimism and remain invested in the stock market, albeit fully hedged against uncertainty and volatility.

 

One of the best strategies for accomplishing this is investing in dividend stocks as a portfolio stabilizer and a source of returns in an uncertain economy. In order to help you decide if dividend investing is right for you, we’ve put together this comprehensive guide. Of course, always consult with your financial advisor to understand what you’re buying and why you’re holding it in your portfolio.

 

What is Dividend Investing?

 

Dividend investing is a strategy focusing on investing in companies that regularly distribute a portion of their profit as dividends to shareholders. The most direct way a business can affect shareholder performance is through a cash dividend. A cash dividend is simply a return of investment to the shareholders. Each year, or each quarter, the board of directors announces a dividend that is paid in cash—sometimes in stock—directly to shareholders. 

 

The better-performing companies will periodically increase their dividends. Some companies have been paying dividends for decades, so it becomes an expectation and a way to attract new investors. Once a company starts paying a dividend, it will go to any length to continue to pay it because not doing so indicates the company may be in trouble. 

 

Creating Your Dividend Investing Strategy 

 

Not all dividend stocks are created equal. As with any investment class, it’s important to establish strict criteria for selecting the stocks that best match your profile and meet some standard of quality. Chasing the highest yields can be as risky as investing in junk bonds. Over the long term, companies with an established record of uninterrupted dividends, a clean balance sheet, and a positive earnings outlook will outperform the higher-yielding investments in terms of both dividend income and capital appreciation. 

 

When investing for the long term, diversification is always the key. With dividend stocks, you can invest across many sectors and among various dividend-paying investments, such as common stock, preferred stock, real estate investment trusts (REIT), ETFs, and mutual funds. 

 

What to Look for in a Dividend-Paying Company

 

With dividend stocks, investors need to apply the same due diligence they would use to purchase any stock, careful not to focus strictly on the dividend yield, which can be especially alluring after the stock price has fallen. It would be essential to know why the stock price fell and whether there may be the possibility of a dividend adjustment. 

 

One of the most important factors to consider is the company’s debt-to-equity ratio, which could put pressure on the dividend during a down economy if it is too high. Dividend payers that have no trouble generating excess cash flow can be relied upon to pay their debt and dividend in any economic environment. 

 

You also want to look at a company’s dividend payout ratio, calculated by dividing the annual dividends per share by earnings per share. The dividend payout ratio represents the portion of net income the company is paying out as cash dividends. Companies with a payout ratio of less than 50% are considered financially stable, with the potential to increase earnings over time. 

 

What to do with Cash Dividends

 

Investors need to decide what to do with their cash dividends. If the company is performing well and driving solid investment performance, you probably want to reinvest them back into the company. That drives investment performance further. However, if the multiples become unattractive over time, reinvesting in the company may not make sense. That should prompt a decision as to whether the stock is still attractive.

 

Whether you hold or reinvest your cash dividends in the company, they are subject to income taxes. The advantage of dividend income over other forms of income is it is taxed at a maximum rate of 20% (plus a 3.8% surtax for the highest-earning taxpayers). The tax rate for taxpayers in the lower tax brackets is 15%. 

 

Why Now Is the Time to Invest in Dividend Stocks

 

While high-quality dividend stocks are not likely to generate market-leading returns in any given year, they will lose less money on the downside, which is the key to growing portfolio value over the long term. Investing in high-quality dividend stocks is not about generating outsized returns; instead, it is about generating a rate of return meaningfully greater than the inflation rate while preserving capital during protracted market declines. Dividends are always positive, so they are a counterweight in down markets.

 

Many investors are unaware that dividend yield and growth have accounted for approximately 40% of long-term stock returns since 1930. During decades when inflation averaged more than 5%, they accounted for 54%. 

 

Eventually, the U.S. economy will right itself, and sanity and stability will return to the markets with large-cap, dividend-paying companies leading the way. Until then, and even then, dividend stocks will provide an effective counterweight to most risks investors will encounter, including inflationary pressures (or stagflation), increased market volatility, interest rate fluctuations, or market declines. There has never been a better time to make dividend stocks an integral part of your investment portfolio.

 

Adding a dividend stock component to your portfolio will not only increase your tolerance for volatile markets, but it can also become an enduring source of income regardless of the movement of stock prices, inflation, and interest rates. 

 

Ready to find out if dividend investing could be the ballast you need in uncertain times? Or perhaps a source of income you could use to fund your future retirement?

 

No matter where you are in your investing or retirement journey, our team at Platt Wealth Management can help. Simply schedule an appointment with one of our trusted advisors to discuss your opportunities today.

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How to Recover from A Bad Sequence of Returns Early in Retirement

How to Recover from A Bad Sequence of Returns Early in Retirement

Retirement is supposed to be a time of relaxation and enjoyment, but sometimes things don’t go as planned. One of the biggest challenges retirees face is the unpredictability of the stock market. A bad sequence of returns early in retirement can be devastating and leave retirees with no options.

 

But it’s important to remember the effort you’ve put into building your financial foundation. You’ve put in years of hard work, and now it’s time to enjoy the rewards of your dedication! Like every other obstacle you’ve navigated, you will get through this. Focus on your long-term goals and adapt your financial strategy while maintaining a positive outlook because retirement—even in a market downturn—still offers numerous opportunities to explore new interests, spend quality time with loved ones, and pursue lifelong passions.

 

Let’s explore ways to recover from a bad sequence of returns early in retirement.

 

Keep Your Cool: Tackling Challenges with Poise and Positivity

 

 We’ve said it before, but it bears repeating; keep calm and remain positive. Take a deep breath and remind yourself that the market has ups and downs. Keep a cool head and avoid making impulsive decisions. And remember, staying positive in the face of market fluctuations is a choice. Embrace your inner optimist, and you’ll survive the storm, becoming stronger and more resilient.

 

With a few simple tips, you can transform your everyday routine into a serene sanctuary and remain focused on the positive.

 

  • Get Outside and Practice Mindfulness: Enjoy a leisurely walk in a park or forest, letting nature help you relax. Inhale the fresh air and appreciate the sights, sounds, and smells of the outdoors. Allow your thoughts to come and go.
  • Digital Detox: Allocate screen-free time daily, allowing your mind to rest. Read a book, engage in a hobby or daydream. Experience the joy of being present in the moment.
  • Get Moving: Exercise is a natural stress reliever. Find an activity you enjoy, such as yoga, dancing, or swimming. Stay active, release endorphins, and enjoy a more relaxed state.
  • Remember the Cycles and Focus on the Long Term: Keep in mind that downturns are a normal part of the ride, and eventually, things will improve. Think of your investments as a flourishing garden that needs time to grow. It might have a few weeds now and then, but with patience and care, it will blossom into something beautiful.
  • Stay Informed: Knowledge is power. Keep yourself updated on market trends and seek professional advice to make informed decisions. Understanding the bigger picture can help you stay calm and optimistic.

 

Budget Reset: Confront Financial Changes with Confidence

 

A bad sequence of returns can mean that you’ll need to adjust your budget. Look at your expenses and see where you can cut back. It’s essential to be realistic about your spending and to prioritize your needs. If your retirement savings have taken a hit, consider working part-time, supplementing your income, and building up your savings again.

 

Expenses to Trim:

  • That gym membership you’re not using? Swap it for free yoga videos or join a walking group.
  • Cut back on dining out – become a kitchen connoisseur and host dinner parties instead. Bye-bye, overpriced takeout. Hello, gourmet goddess!
  • Reevaluate your subscriptions – do you really need Netflix, Hulu, and HBO Max? Enjoy one at a time instead.
  • Save on travel costs by exploring local hidden gems. Who knew there was so much to discover right in your backyard? Check out your local tourism websites and plan a staycation this year!

 

Part-time Work Opportunities:

  • Share your wisdom by becoming a consultant in your field. You’ve got the experience. Why not spread the wealth (knowledge)?
  • Flex your creative muscles and try your hand at writing, photography, or even pottery. Etsy, here we come!
  • Teach a class or workshop at your local community center. Empower the next generation while making a little extra cash.

 

Expert Insight: Diversify for Success and Consult an Advisor

 

Diversifying an investment portfolio is crucial for managing risk and ensuring long-term financial stability. By spreading investments across various asset classes (like stocks, bonds, and alternative investments), you reduce the impact of any single underperforming asset on your overall portfolio. Diversification helps mitigate risks associated with market fluctuations and increases the potential for higher returns.

 

Here’s how to build a well-balanced, diversified investment portfolio:

  • Combine Different Assets: Consider stocks, bonds, and cash as the essential components of your financial portfolio. Mixing them creates a diversified structure that can handle market fluctuations.
  • Add Alternative Investments: Real estate, commodities, and private equity can add diversity to your portfolio and help reduce overall risk.
  • Explore Various Investment Types: Be open to different styles of investments, like growth and value stocks or short- and long-term bonds.
  • Regularly Review and Rebalance: Periodically assess and rebalance your portfolio. As markets change, your investments should adapt accordingly. Stay informed on trends and adjust when needed to maintain a balanced portfolio.
  • Consult a Financial Planner: A financial planner can assist you in creating a diversified portfolio tailored to your specific needs and risk tolerance, ensuring that your investments remain aligned with your goals.

 

Key Takeaways

 

Recovering from a bad sequence of returns early in retirement can be a challenge, but you can overcome it with the right mindset and strategies. Remember to stay positive, keep calm, and focus on your long-term goals. Consider adjusting your budget and exploring part-time work opportunities. Also, be sure to diversify your investment portfolio and seek the advice of a trusted financial advisor. If you don’t have one, Platt Wealth Management can help.  Schedule an introductory call to learn more.

 

By taking these steps, you can get back on track and enjoy the retirement you’ve always envisioned. Take charge of your financial future, adapt to the market’s ebbs and flows, and embrace the next exciting chapter of your life with confidence and resilience.

 

Remember, all new experiences in life require an adjustment period. Sure, it might be a little uncomfortable initially, but with a few strategic tweaks, you’ll be strutting your stuff in no time. Cheers to living your best (retired) life!

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Historic Fed Rate Hikes (Again): Where Do We Go from Here?

Historic Fed Rate Hikes (Again): Where Do We Go from Here?

At its March 2nd Federal Open Market Committee (FOMC), the Federal Reserve board voted to raise short-term rates another 25 basis points—the second such increase this year. It was the ninth rate hike since March 22, 2022, in an all-out effort to tame rising inflation, which had surged to its highest levels in 40 years.

 

The number of rate hikes is not unprecedented—the Fed increased rates 17 times between 2004 and 2006 to cool a bubbling housing market. What is unprecedented is the velocity of the rate hikes, taking the short-term rate from near zero to nearly 5.0% in a relatively short period of time. That period included four increases of 75 basis points and two 50-point hikes. Such steep increases have been unheard of in the last three decades.

 

By some measures, inflation appears to be cooling somewhat though prices of many essential items remain at record high levels. Where the Fed goes from here is not entirely clear. Since its initial burst of rate hikes last year, the Fed has been walking a tightrope in trying to curb rising inflation without tipping the economy into a deep recession.

 

Recent Events Increasing Fed Challenges

 

In an ideal world, the Fed would be able to gradually moderate inflation by closely calibrating its rate hikes until demand and supply are balanced while allowing the economy to grow. But the events of the first quarter of 2023 have reaffirmed that this isn’t an ideal world, which complicates the Fed’s job and notches up the tension on the tightrope.

 

Though the stock market rebounded nicely in the first quarter, it wasn’t without significant economic and geopolitical drama, creating a wall of worry for the market to climb. In just three months, we’ve experienced several remarkable and potentially cataclysmic events, including:

 

  • Rising tensions between the U.S. and China punctuated by the downing of a Chinese spy balloon that was allowed to traverse most of the U.S.
  • The U.S. inching closer to a “hot war” with Russia as it escalates its military aid to Ukraine.
  • The second largest bank failure in U.S. history with fears of more to come.
  • Brazil and Saudi Arabia joining China, Russia, and a dozen other countries in replacing the U.S. dollar as their primary trading currency.
  • An unexpected reduction in oil production by OPEC+, driving up oil prices sharply with an increase in gas prices to follow.
  • Lingering concerns over an imminent recession.

 

And that was just one quarter. In most years, any one of these events would weigh heavily on the U.S. economy. The Fed must contend with all of them at once as they consider their next move.

 

How Did We Get Here? 

 

With interest rates already near zero at the beginning of the pandemic, the Federal Reserve put quantitative easing on steroids as the economy plunged into a recession, ballooning the federal balance sheet to nearly $9 trillion. This was done to increase the money supply and stimulate economic growth during the damaging COVID pandemic. As the growth of production of goods and services slowed, the raging money supply growth eventually overtook it, causing the price of goods and services to be bid up. When too many dollars are facing too few goods, you get inflation. 

 

Then add in supply chain issues and increasing wages occurring at the time, causing employers to have to pay more to get people to come to work. That contributed heavily to inflationary pressures on the market. Despite the record low unemployment numbers at the time, there were still four to five million people not working, not contributing to production, which also contributed to the supply chain issues and rising prices.  

 

Often ignored in the inflation equation is the velocity of money—the rate at which money is exchanged in the economy. Following the financial crisis in 2008 and the COVID pandemic in 2020, consumers were more inclined to save their additional dollars out of caution. During COVID, it was also because many services were no longer available for purchase, such as travel and restaurants. 

 

Then, as COVID restrictions lifted, consumer activity reached pre-pandemic levels, increasing the velocity of money and setting the stage for more prolonged inflation.

 

As the inflation rate began to tick up in 2021, the Federal Reserve viewed it as transitory, caused by temporary supply and demand imbalances that would self-correct. That didn’t happen and inflation worsened, catching the Fed and everyone else off guard. That’s the reason the Fed took such drastic actions in 2022, increasing fears it could lead to a deeper recession.

 

Where We Go from Here

 

 Consumers have been spoiled by low interest rates for a while. However, to put higher rates in perspective, mortgage rates, which are currently hovering around 6%, were as high as 18.5% in the 1980s. A normal business cycle lasts about six years, which usually encompasses an economic slump and an economic recovery.

 

Coming off a deep, albeit short-lived, recession in 2020, interest rates were kept low for an extended time and must now rise to combat inflation. The good news for consumers is an increase in rates is inevitably followed by a decrease in rates. The bad news is that it typically happens when the economy is slowing down. 

 

At Platt Wealth Management, we remain committed to helping you navigate these challenging times. We also encourage you to stay informed and engaged with the economy and markets. As we’ve seen throughout history, the markets are resilient, and they recover to new highs over time.

 

Of course, we are always here to answer your most pressing questions and address your concerns. Simply reach out to the office to schedule a time to speak with your advisor.

 

Sincerely,

Your Platt Wealth Management Team

 

 

Resources:

 

Federal Reserve Board’s press release on the latest rate hike: https://www.federalreserve.gov/newsevents/pressreleases/monetary20230302a.htm

 

FOMC meeting calendar and information: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

 

A history of Fed rate hikes: https://www.stlouisfed.org/on-the-economy/2015/september/short-history-federal-reserve-interest-rate-changes

 

Bureau of Labor Statistics on inflation: https://www.bls.gov/cpi/

 

Supply chain disruptions and their impact on inflation: https://www.brookings.edu/blog/up-front/2021/10/12/how-global-supply-chain-disruptions-are-fueling-inflation/

 

The velocity of money and its impact on inflation: https://www.investopedia.com/terms/v/velocity.asp

 

Federal Reserve’s perspective on transitory inflation: https://www.federalreserve.gov/newsevents/speech/brainard20210601a.htm

 

Historical mortgage rates in the U.S.: https://fred.stlouisfed.org/series/MORTGAGE30US

 

Business cycle basics: https://www.investopedia.com/terms/b/businesscycle.asp

 

 

 

 

 

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