For more than a year, the markets have been fueled by low interest rates, quantitative easing (the Federal Reserve injecting money into the economy) and stimulus and relief legislation from the Federal government aimed at easing the cost of the shutdown following COVID. About two months ago, the Fed began signaling that both quantitative easing and low rates would begin reverse course, and further stimulus from the Federal government seemed to be stalled with the much-debated Infrastructure Bill being bogged down in Congress. Both sources of easy money seemed to be running out of steam to keep the engine of the economy and the stock market running in high gear. Consequently, the market has been choppy over the last month or so, with more down days than up.
A growing concern is the resurgence of inflation. Essentially, inflation has been held in check since the early 1980’s. Paul Volcker, then chairman of the Federal Reserve, was the first to use interest rates as a tool to combat inflation. Volcker jacked up rates to almost 20% which created a deep recession, but inflation was overcome. Since the 1980’s, interest rates have held inflation steady, but that might change now, because of the unique economic circumstances following the pandemic. Demographic, technology, and work-from-home trends are all different now than before the pandemic. These three trends are directly contributing to wage inflation, as a shortage of qualified workers continues to drive up wages. Wage inflation is very difficult to contain, so more and more the market is paying attention to these trends.
Finally, what does uncertainty mean to the individual 401(k) investor? It requires patience and a long-term perspective on investing. One thing is almost certain, the market which often vacillates in the short term, tends to grow along with the economy over the long term. We continue to monitor our allocations as economic and market conditions evolve. As always, be careful to measure your personal tolerance for risk especially if retirement is in view.
The commentary and market insights provided by Slavic401k are for informational purposes only and do not guarantee future results.