Q: So the stock market hit an all-time high recently (even though we’ve seen some volatility in the last few weeks), but many people still feel like they're struggling financially right now. For people who may not invest in stocks directly - does how the market performs affect their everyday lives in any way?
- A: The markets impact almost everything we do each day. Market conditions for individual companies directly relate to the products/services they offer the public- and the prices at which they can do so. As companies rise/fall, we see the ripples of their performance (or lack thereof) in the supply-chain as other companies attempt to produce their own products/services. The wheels of the market drive our economy, of which we are all a participant.
- Maybe put simply, as companies do well- we should see their ability to grow and provide their goods/services at an increasingly efficient rate. That’s good for consumers.
Q: What about inflation? I know it's leveling off now, but I read in an NPR article last week that the cumulative effect of inflation on grocery prices over the last three years makes everything still seem so much higher. For instance, mayonnaise is 43% higher now than three years ago. With inflation slowing down, should those prices come down now - or how will the market adjust?
- A: Inflation continues to be one of the top metrics financial professionals are following- with the most recent year-over-year reading at 2.6%. As many of your listeners likely recall, at the most recent meeting of the Federal Reserve, a decision was made not to drop interest rates, and chairman Jerome Powell has been clear that inflation’s target is squarely at 2%. Of course, he’s left the door open to a drop before inflation officially hits that target number. We’ll talk a little more about that later.
- To your question on falling prices: we refer to the ‘drop’ in price of a good or service as “deflation” versus “inflation”. We have seen this in pockets of the marketplace, but not across the entire economy.
- There’s no question that prices have risen dramatically since the pandemic began. Frankly (and unfortunately), it’s hard to imagine mayonnaise dropping in price by 43% while inflation is ticking along at 2% or 3%. I don’t think that’s in the realm of possibility given the current economic environment.
- There are some goods that have gone down in price, though. For example, back in June, CNBC reported that as of May 2024, prices of Apples had dropped 13.2% since May 2023, and Ham, Cheese, and Potatoes had also gone down in price. There was also some deflation in the prices of furniture, airline fares, used cars/trucks, and even computers. You might notice that several of the items that dropped between May 2023 and May 2024 are actually normalizing after supply-chain disruptions coming out of COVID. An easy example to point to is the cost of furniture- in 2022 and 2023, the backlog of furniture orders and difficulty of finding inventory drove prices up. It’s not a shock, then, to see those prices come back down as the supply catches up with demand. Those specific items experiencing some deflation is simply not enough to bring our overall inflation measure down to 2% or below.
Q: How does inflation affect other aspects of the economy? Like buying a home or starting a business?
- A: When everything is more expensive, it becomes more expensive to do anything! If you consider buying a home, for example- the value of a home for sale is a product of what a potential buyer is willing to spend on the home. That value is likely a function of how much it would cost to build a new home in a similar area, how available similar homes are in the area, a comparison of rental prices in the area, and the list goes on. With inflation taking off post-pandemic, and the pent-up demand of new housing in most parts of the country, home prices have come up quite a bit (despite mortgage rates rising, by the way), because the alternatives to home buying have also become more expensive.
- The same is true for starting a new business. Start-up costs are always a concern when starting a new company, and as they rise- it becomes harder for entrepreneurs to get a new business off the ground. Furthermore, as interest rates continue to rise, new business owners are faced with higher costs to borrow the money needed to start a business. Bottom line- it costs more to open the business, and if you’re forced to borrow to pay for the opening, it’s costing you more to do that, too.
Q: Did anything of note happen during the most recent Federal Reserve Meeting?
- Q: The headline is that no rate cuts were announced. There are still three Federal Open Market Committee (FOMC) meetings remaining over the balance of the year- September, November, and December. We tend to believe that rate cuts are on the horizon, but it’s tough to say if/when they will be announced. Chair Powell was clear that it could happen as soon as September, but time will tell. I found it interesting that chair Powell sees some “quality disinflation” in the data, which is fed-speak for slower-growing-inflation, which supports cutting rates. One of the Fed’s mandates is to ensure the health of the labor market, and there is no doubt that the chair wants to be sure he does not put the labor market in jeopardy by keeping rates too high for too long. They will be studying the data at their next meeting in September to determine if rate cuts are in order- to follow the chairman’s thinking, it would require that inflation continues to move down, growth remains reasonably strong, and the labor market remains consistent with current conditions. The door is open for a cut in September, but any decision will depend on the data put before the board on September 17th.
Q: What about people approaching or at retirement age, will they need to have more saved right now to be able to afford cost of living increases?
- A: Approaching retirement can be a trying time for an investor. The shorter time horizon available for investments to grow can result in a pull-back in the market becoming harder to bounce back from, just as you’re getting ready to withdraw those funds to live on.
- So, when planning for retirement, it’s important to factor inflation expectations in to your retirement funding plan. The higher the inflation expectation in a retirement plan, the larger the sum that is needed to retire and successfully hit your spending goals.
- Now, if you’ve gotten to retirement without a plan thus far, then working with an advisor to determine how much can be spent each year to leave enough for your expected life expectancy becomes quite important.
- For folks that are already retired and living on a fixed income- there are some income sources that may adjust with time. Social Security, for example, will give raises to some participants from time to time. In March of this year, the Social Security Administration announced that 71 million Americans received a 3.2% increase in their social security benefits in 2024. Of course, often times social security is not the only income source for retirees- and some of those other income sources may not see raise (like certain pensions, or just withdrawals from your portfolio or personal retirement accounts).
- When it comes to dealing with inflation and retirement, it’s important to plan early and if it’s too late to plan early - then plan now.
Interview with: Travis Taylor, Vice President – Investments, of the Williams and Roof Wealth Management Group of Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a Registered Broker Dealer and Non-Bank Affiliate of Wells Fargo Advisors.
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Disclosure: Wells Fargo Advisors is a financial supporter of WKMS
