Good Afternoon and Happy Fall!
How can it be that it is almost October! September is such a transitional month. The long days of summer are quickly evolving into cooler, shorter days. The trees and flowers are beginning to look tired with some already showing signs of fall colors. Stores are stocking up for Halloween with Christmas decorations coming soon! Even the stock market had a great summer rebound followed by the phenomenon known as the "September Effect," named due to the historically poor returns in that month going back almost a century. This year's high inflation isn't helping matters.
Inflation has caused price increases from the grocery store to the gas pump. If you're buying or building a home, prices have gone sky high for materials like lumber, concrete, glass and steel. New and used cars are much more expensive than they were just one year ago.
In order to get inflation under control, our Federal Reserve has a few arrows in their quiver. They can sell securities in the open market which takes money out of circulation, they can raise the reserve requirement for banks and they can raise interest rates.
A few weeks ago, Federal Reserve Chairman Jerome Powell delivered the unwelcome but not unexpected news that there would be "some pain to households and businesses" as the Central Bank increases interest rates in an effort to cool off inflation. True to his word, Chairman Powell, announced another 3/4 point interest rate hike, bringing the current Fed Funds rate to a range between 3-3.25%. Last year at this time, the rate was near 0%. Another two rate hikes are widely anticipated before the end of the year which could raise the Fed Funds rate to the 4-4.5% range.
When interest rates rise, everything from credit card rates to mortgages are affected. The average credit card interest rate is currently 19.20%. One year ago the average was 14.5%. The national average for 30 year mortgage rates is 7.42%. Last year the average was 2.86%.....quite a big change in just one year.
We do have some control over how much higher interest rates impact us:
-Pay down debt, especially credit card debt, as quickly as possible. Higher interest rates make carrying balances on credit cards, a very expensive proposition. Once you're able to pay down that credit card debt, carry two credit cards that pay you back. I like American Express and Chase Sapphire. Pay them off monthly and collect the points for use in hundreds of different ways.
-Carefully consider large purchases. It may not be the best time to buy a home, a vacation home or even a new/used car. If you have the luxury of waiting, a better entry point may be down the road when interest rates are lower or when inflation has cooled and the prices of homes and cars have declined. In some cases, we don't have a choice when it comes to moving or buying a new car. When that's the case, keep in mind that you can always refinance at a later date.
-Keep a healthy "emergency fund" in your savings account and don't hesitate to shop around for the best rates! Credit unions tend to have higher rates than traditional banks so if you're lucky enough to belong to a credit union, establish your emergency fund there. If you feel comfortable with online banks, you will find much higher savings account rates there...and those accounts are FDIC insured just like your traditional brick and mortar banks. Your emergency fund should be able to cover a minimum of 3-6 months worth of living expenses.
-If you have investment accounts outside of JLB Wealth Management Group, be sure to rebalance those accounts so that you are invested in only the highest quality stocks, bonds and funds (we can help with this).
By all accounts, 2022 has been a challenging year. It has not been fun to watch our account balances decline precipitously while at the same time paying more for essentials like food and gas. We are already seeing some price declines but have yet to feel any relief from the stock market. At times like this, it is important to keep a couple of things in mind:
-It is normal and healthy for the market and the economy to cool off from time to time. The stock market had been on a bull market run for 11 years and we've enjoyed artificially low interest rates ("cheap money") for quite some time. In fact, it was this very "easy money" policy coupled with all things Covid that created a high demand, low supply, inflationary environment.
-Never in the history of the stock market has there ever been a downturn that wasn't followed by a rebound. The market will rebound.
-This won't last forever...nothing does. Economists are already projecting interest rate decreases for next year. Nothing stays the same for long!!
With that in mind, I wish you a glorious fall and look forward to seeing many of you on our annual Thanksgiving Pie day! More on that to come!
Warmest Regards,
Johanna