If you are younger than 60 you might not remember the crippling inflation of the 1970’s. Prices and interest rates not only skyrocketed but became embedded in the psyche of the country. The cost of everyday goods kept going up, workers demanded and got raises and interest rates leapt to keep pace. There was no end in sight until Paul Volker, head of the US Fed, raised interest rates so high that businesses and consumers could temporarily no longer afford to borrow. This triggered a sharp recession in 1982.

With inflation under control, sentiment quickly rebounded. In the subsequent 18 years, from 1982 to 1999, the stock market (S&P500) enjoyed one of its most stable and lucrative periods, averaging an incredible 18.2% per year.

Today, we are perhaps in a similar, though less dramatic situation – 30 year mortgage rates are not 17%! Yet the economic damage from the pandemic is not that different from what helped fuel inflation in the 1970’s: oil shortages and debt spending on the Vietnam War, among other things.

Today, the Fed seems intent on following the same playbook. Before the pandemic there was $15 Trillion held in American bank accounts. Today that number is $18.9 Trillion. People continue to spend money and the job market continues to be heated overall. This abundance of cash is fueling demand and inflation by chasing limited goods and services. The only way the Fed believes it can break this cycle is to reduce demand, and to do that it needs to slow economic activity.

As long as inflation persists, the Fed will likely continue to raise borrowing costs. This means that although the stock market is down around 20% so far this year, we are likely not out of the woods yet.

Our role however as prudent, long-term investors is not to guess when the Fed will ease off the brakes but to stay the course. In 1982, the total market drop from ‘Volker’s Recession’ was 27%. Amazingly, it took only 83 days from the market bottom to get back to its prior peak!

Could we experience a similar bottoming and recovery sometime in the next year? It’s certainly possible, though there are important differences between today’s economy and the Reagan era. The national debt in 1982 was $1.1T and today it’s $31T. The rebound of the 1980’s followed a lousy decade for investment returns; conversely the 2010’s were a terrific decade for the US stock market.

Yet the data suggests pent-up demand remains high. Millions of people remain desperate to find their first home and are waiting to pounce if prices fall. Cash on the sidelines mean investors are likely to dive back into the stock market if sentiment improves.

While that would certainly be a great next chapter to write, it’s not assured. Inflation remains a danger – to business, to consumers, and certainly to retirees who can’t afford the erosion of their portfolios and purchasing power.

Let’s take a step back then and consider how we, as planners and investors, handle all this uncertainty. The answer, as with many things, lies with where you are in life:

If you are under 55 – our suggestion is don’t worry and stay the course. This economic slowdown is one of 4 or 5 more you are likely to see in your lifetime. Continue to save; spend within your means and avoid debt so in case of a job loss, you can maintain financial health until your industry recovers.

If you are close to retirement – these are hopefully your highest earning years. Keep saving as much as possible especially if the market continues to drop. Past market declines have often been a wonderful time to invest. If you have flexibility around your retirement, let’s talk about whether the recent downturn could reduce your income in the first years of retirement. Use flexibility to your advantage as working a bit longer might be an opportunistic approach.

If you are currently retired - if you were on track last year, you are likely still on track this year. The retirement financial plan we have in the past prepared for you presumes multiple cycles of recession and recovery over your lifetime. However, you may be feeling the pinch of higher costs compared to your portfolio income withdrawals. Try to hold the line on spending. Let’s review your budget carefully and talk about strategies to reduce spending. For instance, if traveling, travel to where the dollar is strong (Spain!)

Given the rollercoaster ride of the last year, we’ll be reviewing your individual situation carefully during our fall meeting. In the meantime, regardless of where you are in life, it’s important to stay the course investment-wise. Longwave portfolios have been positioned cautiously for several years. Specifically, we have been over-allocating to cash-rich ‘value’ companies which are doing relatively well right now. In down years like this one, if we can lose less, that’s a win.

Finally, in times of flux, no one wants to feel like they are in it alone. If there are people in your life who are not getting consistent, proactive communication about their finances, consider this a great time to refer a friend, family member or colleague. Getting organized before year-end sets you up for success in the New Year.

As with all seasons, there is a beginning and an end. Right now, the heat of summer has faded and we embrace this time of transition and change. As always, we navigate it together.

The Fed Continues to Press the Brakes: What It Means for You and The Economy