Drivers Impacting Markets Over The Next Few Quarters

• Federal Reserve policy. The Fed might raise interest rates a couple more times over the next few quarters. GDP is up overall, so there doesn’t seem to be much to worry about from a production standpoint. I predict that we can expect more speeches, a lot more speeches, which will be the Fed’s way of warning of interest rate hikes. However, these actions will likely not be as jarring or swift as what we saw last year.
• Inflation. The Fed’s actions were supposed to cool off inflation and prevent the economy from overheating. Have these actions worked? Most Americans still find that a loaf of bread is about 25% more expensive today than it was just a couple of years ago. Gas prices are also up. Inflation will likely continue for the next several quarters, but as I stated in my last article, the Fed’s actions are seeking to balance inflation. Much the way a great symphony orchestra uses point and counter-point, I expect that we will see the Fed and inflation doing a similar dance.
• Credit. Silicon Valley Bank’s failure left 1.5 trillion in debt that has to be restructured. This will reverberate, to some degree, across banking and lending. I predict tight credit conditions for the next few quarters. SMBs and individuals will likely struggle to get favorable credit terms. The era of cheap and easy money will likely be limited for a few quarters.
• Valuations. Most analysts calculate stock valuations using the price-to-earning (P/E) ratio. The P/E ratio equals the company’s stock price divided by its most recently reported earnings per share (EPS). This makes earnings a key driver in valuations. Over the next 3-6 months, I do not predict significant valuation growth, not at a level that will significantly fuel growth of corporate earnings and stock prices.
• Employment. The labor market continues to be strong, even with layoffs and labor strikes. Many people are often able to quit one job and get another job quickly. It’s hard to say where this will end up in the future, but for now, employment is not a short-term concern.

This analysis is, of course, speculation on my part. It’s informed by years of experience in this field as well as by the thought leaders and indexes I consistently follow. However, as I have said numerous times, I cannot predict the future.

What Do I Recommend Right Now? 

Given everything I’ve said above, what makes sense for the next several quarters?

• Avoid long-term debt right now, if possible. I would advise most people to wait until interest rates and credit conditions are more favorable for borrowers. Even SMB borrowers might find better options in 12 months than we see today.
• Delay real estate purchases. The summer months sometimes cause families to reconsider purchasing a summer or vacation home. If your long-term plan called for this, you might want to consider delaying one more year. Credit conditions could be more favorable by next year. A short-term rental of a cabin on a lake could be a much better option.
• Avoid big changes. I don’t recommend large changes to investment portfolios, at this time. This is a good time to hold steady and watch carefully—something we already do on your behalf.
• Stay with your long-term plan. The financial plans we design for clients anticipate periods like this where forces are in tension against each other. A long-term plan, I believe, is still your best bet to achieve lasting and meaningful wealth.
• Talk to your advisor. This is a good time to review your long-term plan with your advisor. The summer months provide many people with a more relaxed schedule.

Wrap Up

I cannot predict the future. However, at Strait & Sound we believe clients with the discipline to follow long-term plans are most likely to achieve their long-term wealth goals. Building wealth takes time, patience and tenacity. It’s nearly always a good idea to live within, or preferably beneath, your means so you can save, invest and build financial strength. These are crucial disciplines to achieving complete financial independence, where you never have to worry about money again. If you have questions about anything I’ve said here, please know my door is open.