2023 is turning out to be a historical year for many different reasons. Who would have thought at the beginning of the year we would be worried about a Middle East conflict given what was happening in Ukraine. I pray for the people in that region that they can enjoy peace in the future. Other issues impacting the end of 2023 include govt shutdown, change in interest rates and the upcoming presidential election next year. I am going to take a few min to discuss all these issues and how they relate to the market.
Congress narrowly escaped a government shutdown by passing a temporary bill keeping agencies open until November 17th. This is a temporary measure that was necessary to avoid larger problems that would have happened if they had shut down. The market would have responded negatively to a shutdown, in my opinion. It still may if they don’t get a long-term solution passed.
The fed increased rates four times in 2023, holding steady this past September. The purpose of increasing rates for the past year and half is to combat inflation and by all measures they have been successful in doing that. The Feds’ goal is to see inflation around 2% and currently it is around 3.7%. Inflation rate started 2023 at 7.5% [i]Most economists are predicting a “rough landing” in terms of interest rates stabilizing early next year and are hopeful that rates can start to decrease later next year. [ii]We are experiencing something called an inverted yield curve where short term rates are higher than long term rates and historically that is the beginning of a recession. Does that mean a recession is forthcoming? Not necessarily. It just means historically, times of an inverted yield curve are followed by a recession.
The Israeli conflict is problematic in my option for several reasons, but I am particularly concerned with the number of conflicts compounding on each other. We just sent another $6 billion in aid to Ukraine and now we will need to come to the aid of Israel and at what point does this put strain on our markets? What if other conflicts were to happen? War can be a “good” thing for markets in terms of the economic boom it creates so increased military conflicts could expand market growth beyond the growth we were already seeing with Artificial Intelligence.
As we look to 2024, the elephant in the room is the upcoming presidential election. It appears that we will have another Trump vs Biden election. Is the country ready for the divisiveness and battles that will take place on top of everything else that is happening? Can one of the other candidates gather enough momentum to take the nomination? How will the market respond to whomever is running and whomever wins? These are questions that are yet to be answered. I am confident that no matter who wins they will have a full plate in terms of international conflict and internal economic issues.
2024 will hopefully bring clarity to many of these questions but in the meantime it’s important to keep in mind that a truly diversified portfolio can withstand many of these potential problems. Allocating across several different asset classes and areas protects us from overall market risk. Market risk can never be truly “diversified away” so we will always have some level of market risk to work through. Determining the amount of risk you want is key. How you allocate the balance of your portfolio not in stocks and other equities becomes very important. Luckily, we have seen interest rates rise making fixed investments like bonds, annuities, and CDs very attractive. My philosophy is to have your monthly income derived from fixed investments as much as possible. That way your income is fixed and not determined by the market. When you combine these fixed payments with your Social Security payment (s) and pensions you are guaranteed a certain amount each month. With all the uncertainty in the world, knowing your monthly income is certain is a powerful feeling.
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