Changing Situation and Financial Investments

The high inflation numbers. Fed is going to start raising interest level. Stock market has been volatile changing daily. Worse market is down today. Loud screamers advising sell everything or buy everything. What to do? 

First don’t panic. It is a change in the market. Making drastic or daily moves are not the best idea. No one really knows what the market will do. I have concerns and made changes to my 401K yesterday. Will explain what and why below. (Not a financial adviser. My knowledge is reading a lot of financial articles and subscribing to an advisor)

 

Interest rates were lowered or held low by the Federal Reserve since 2008. Now that inflation has shot up to 7.5% in January the Fed will reacted by raising rates.  An increase from 0-0.25% is way overdue. 3-4 raises to 1-1.25% will not trash the economy this year. Long term the Fed historically overshoots, but may take quite a while.

 

However rate increases will affect bonds, the stock market and possibly slow real estate down. Existing bonds lose value as new bonds with higher interest rates are issued.  Bond market is much larger than the stock market with more transacted daily. The stock market grew ~21% in 2021 as the Fed injected liquidity and low rates. Now the stimulus is being withdrawn and rates going up may affect parts of the stock market more.

 

All I did is move 15% of bond funds into a stable value fund. I moved 30% of stock index funds into actively managed funds. 20% to 2 international investment funds and 10% added to Target year fund.  Closed index fund and Russell 2000 fund. More fees, but experienced management should perform better for the next few years than growth or index investing. Now have 7 different funds in 401K. Am working and contributing. Expecting savings growth despite stock market corrects. Next year will evaluate again.

 

Making investment changes is not an all or nothing approach. No one should be 100% in stocks this year. Nor go to 0% stocks. Be diversified. You could invest in short term bonds up to a year or high interest rate savings instead of stable value funds, but I did not have those options in my 401K. You need to evaluate what you hold and make small changes to balance things out.

 

Think about your retirement funds and make small changes to lower your risk this year. If you are concerned about your situation, get a fee based Fiduciary. For retirees recommend Mauldin Economics Strategic Portfolio (Jared Dillian). Investments are typically 20% stocks, 20% bonds, 20% real estate, 20% commodities/precious metals, and 20% cash for a resilient portfolio. Minimize risk while earning money on your savings.

 

Hope our investments grow this year, but preparing for different times.

Why Aren’t Raises Going Up?

Today’s job report was strong with 313,000 new hires. However January’s burst of wage inflation was a mirage, only 2.6% wage increases February. And that is before adjustments.

With 4.1% unemployment, why aren’t wages going up? The Fed Reserve keeps pointing to the Phillip’s Curve, which shows inflation should follow low unemployment. But it is not happening.

Alan Greenspan, Former Federal Reserve President is one of the critics of the Phillip’s curve. It predicts inflation, which does not appear. Paul Volker was another skeptic of the Phillip curve. The Federal Reserve’s issue may be they do not have a replacement model, and the appeal is low unemployment causing inflation is simple to understand.

Like most complex issues, there are several contributors to the problem. Believe the Federal Reserve is missing critical observations from their models:

The global economy and technology means companies can shop outside local neighborhoods and the United States for lower costs. My company is training engineers to outsource manufacturing planning to Russia and India. Unfortunately the planning quality has been poor to mediocre. Until recently high corporate taxes and low transportation costs have made moving manufacturing overseas desirable.

After 6 months of unemployment, you are no longer considered part of the work force. Many workers stayed in college, took social security, disability or retired early because of not being able to find work. These people are coming back adding to competition to find jobs.

There are 20 million people missing from the work force. Approximately the same number of people with drug convictions due to the War on Drugs. This hidden source of workers is beginning to rejoin the workforce.

The Federal Reserve has also contributed to lower inflation by keeping lending interest rates low. Companies have sure investments in low risk bonds with borrowed funds, rather than developing new businesses. Low inflation contributes to low wages.

Jonathan Tepper co-author of “End Game” and “Code Red”, wondered why a leading indicator for wages that had worked for decades stopped working since 2014. We are in a growing economy with a booming stock market. His article is on MauldinEconomics.com ‘Outside the Box’. His conclusions:

Companies are keeping more of the profits. They are rewarding investors with either dividends or stock buybacks.

Companies are able to keep more profits because of mergers and acquisitions have decreased competition. There are fewer companies with larger market share.

Many workers are living in non cities have limited choices which companies to work for. Combine that with weak Unions to negotiate higher wages.

US CEO wage gap inflation versus regular workers. UK CEO make 22 times average workers. US CEO make 276 times average workers. Less money to spend on worker salaries.

Do not see a burst of wage growth in the next 2 years for the reasons above. However the economy is strong, and wonder if the Federal Reserve has recognized they have finally created 2% inflation? Stronger inflation will increase wages until the next recession.