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Thursday, August 18, 2022

How to invest when inflation is bad and recession is likely

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News on inflationary It’s been bad for months, but recently it’s gotten worse. On Wednesday, the government report that in June, the Consumer Price Index rose at an annual rate of 9.1 percent – the fastest pace since November 1981.

That dire news adds significant pressure on the Federal Reserve to keep inflation in check. The Fed is trying – by raising short-term rates and selling securities 8.9 trillion USD Accounting balance sheet.

But those are blunt tools. Although they can reduce inflation, they do so by slowing the economy. That increases the likelihood that the US will experience a recession – a word that is pairing frequent with “fear” In title and in analysis of the economy.

Some fears are clearly justified. Add the current coronavirus surge, Russia’s war in Ukraine and still-high global energy prices to these problems, and at least you have a recipe for economic trouble.

Inevitably, millions will suffer, if the slowdown is so bad that it can be classified as a recession: Job losses and thwarted dreams are always accompanied by widespread recessions. .

If you’re lucky enough to have the financial resources to invest in stocks or bonds, the upcoming months can be tough, but you can get through them with a little planning.

Readers have asked for advice, and I will try to help. However, do not be delusional. I don’t know where the market or the economy is headed in the short term. Nor is anyone else. No matter how annoying, we have to carry on without knowing it.

The future is never entirely clear, but for now, it’s just a matter of pure guesswork.

Long-term investors might be better off ignoring the news: If there’s ever been time to do so, it’s the right thing to do, because even thorough research on economic data and Financial Upcoming also doesn’t provide helpful guidance.

As Paul Krugman put it in news this week: “The different pieces of information we have don’t seem to be the same.” He added, “Some data suggests an economy is weakening, possibly even on the verge of a recession. Some argue that an economy is still going strong. Some data shows that the labor market is very tight; others, not so much. “

The stock, bond and commodity markets are also unclear. While stocks and bonds have tumbled this year, commodities like oil, wheat and copper have gained in value – but exceptions to that claim are clear.

Stocks haven’t fallen much lately, bond prices have recently risen (as yields, in the opposite direction, have fallen) and oil prices have dropped to recent highs.

What is the trend for the next six months? There are many answers, but at the bottom, no one knows.

The Fed finds itself in a predicament.

“The Federal Reserve System has been given a dual mandate,” said Federal Reserve Bank of St. Louis speak, “Pursue the economic goals of maximum employment and price stability.” These goals are currently at odds with each other.

Price stability has become the Fed’s biggest problem. The recent report on inflation causes interest rates to continue to rise but inevitably.

At the same time, the unemployment rate in the United States is 3.6 percent in june, not far from it the shortest levels for decades. But the country has not achieved “maximum employment.” Many people have selected selected does not work, or is unable to do so, because of problems such as lack of take care of children or one mind about exposure to the coronavirus. With rapid economic growth, more people are likely to join the workforce. But that is not likely to happen now.

The Fed has begun tightening financial conditions to reduce surging demand for goods and services that have contributed to inflation – another way of saying it is deliberately slowing the economy.

The Fed funding rate, which it controls directly, has risen from near zero to its current range of 1.5-1.75 percent, and financial markets guess that it will continue to rise to 3.57 percent in March.

At that point, the Fed may need to start cut rates – at least the markets think so. But why? One possibility is that inflation will then moderate, so the Fed can refocus on ensuring maximum employment.

However, it is also possible that the Fed will not be able to contain inflation without triggering a recession. It is also conceivable that inflation will largely fall on its own, as supply-chain problems caused by the coronavirus and war easily mount, making further rate hikes punitive for people who are working. For example, the price of oil has fallen recently, and gas prices have followedalthough they are still tall.

I said that word April that inflation may be nearing a peak, and it is possible that this premature statement is indeed true now.

But don’t count on it.

What is clear is that the Fed has no real choice: Inflation is hot politics problem that the Fed must be seen as acting to keep it under control, even though its actions are undoubtedly increasing the risk of a recession.

Markets are supposed to be forward-looking, and bear market in stocks – a drop of at least 20% from the market’s peak – is underway.

But I examined the chronology of the S&P 500 bear and bull markets, along with the recessions since 1929, as defined by National Bureau of Economic Research.

The words by the great economist Paul Samuelson, written in Newsweek in 1966, remains largely correct: “Wall Street indexes have predicted nine out of the last five recessions.” By my own generous calculation, the S&P 500 has predicted 7 of the last 16 recessions. That would be a great batting average in baseball – 0.440, or 44% – but it’s essentially as useless as a crystal ball.

The S&P 500 serves as one of 10 factors used by the Conference Board, an independent business consulting organization, to develop Leading Economic Indicators. The index has predicted “sluggish growth” but so far, not a recession. Two other indicators, including current and lagging indexes, are showing strong growth.

This again makes it clear to us that we are in the dark.

The consequences of these high but uncertain risks are simple.

Making sure you can pay your bills and have enough cash for emergencies is important. Keep yours cash in a safe place, and preferably in a place that offers some small profit. Reasonable options include high-yield bank accounts, money market funds, treasury bills and I link.

Then if you begin As an investor and decades ahead, take the foresight. Put your money in diversified, low-cost index funds – including the workplace target date fund – follow the entire stock market. Add a diversified bond index fund as you get older.

For those with shorter vision, the situation is more complicated. You may need to make some trade-offs.

If the economy falls into a deep and prolonged recession, the stock market will likely continue to plunge and may not recover for a while. Preparing for that could mean reducing your stock allocation – even now, after the market drops – if you need to use the money soon.

While bonds haven’t performed well lately and lagged stocks over the long term, high-quality bonds are generally safer than stocks. That is why they are suitable for minimizing risk.

I started my career in the 1970s and reluctantly accepted that I was closer to the end of my career than the beginning. About 40% of my portfolio is in bonds – more than I held 20 years ago and less than I expect in the future. After decades of using stocks, it’s comforting to transition to bonds and lock in some of those gains.

Find the right mix of stock and bond funds for you, depending on where you are in life. The economic news can be dire, but with a little luck and a little planning, you can weather it.

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I am passionate about journalism and using new technology to spread news. I am also interested in politics and economics, and I am always looking for ways to make a difference in the world. I am the CEO of Janaseva News, and I am 24 years old.

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