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06.5.2024 by Donovan Ingle

Economy – Facts vs Feelings

Economy – Facts vs Feelings

In a recent poll conducted by The Guardian, Americans were asked about how the US economy is doing. Surveys are far from perfect science in getting a true reading of people’s thoughts on a topic, but the pessimism of the respondents in this survey was pretty eye-opening.

Here are some of the results:

  • 55% of respondents believe the economy is shrinking
  • 56% think the US is currently in a recession
  • 49% believe the S&P 500 US stock market index is down for the year
  • 49% answered that the unemployment rate is at a 50-year high
  • 72% indicated that they think inflation is increasing

In reality, things actually look pretty good:

  • GDP has continued to grow steadily since the pandemic recession in 2020, with the latest real GDP numbers reading a growth of 1.3% in the first quarter of 2024.
    FAI 06.07.(1)
  • The S&P 500 is up almost 11% so far in 2024 and around +23.5% over the past year.
    FAI 06.07.(2)
  • The unemployment rate is near a 50-year low.
    FAI 06.07.(3)
  • While prices continue to rise, the US inflation rate is currently around 3.4% annualized, down from 9.1% in June 2022.
    FAI 06.07.(5)

So, why is there such a drastic disconnect? I subscribe to three key theories:

  1. Anecdotes carry much more weight than data.

There is no shortage of stories of individuals and families struggling with the high costs of goods and services. Whether they are buying a new house, doing renovations to a house, traveling, or simply going to the grocery store, everyone has a story and is astonished by the cost of everything. What nobody talks about, however, are the pay raises received over the past 3-4 years, Social Security benefits increasing by 6%, 9%, & 3% respectively over the past three years, and making 5+% on cash sitting in a money-market fund.

  1. We are exposed to way more negative news than positive news.

This is a continuation of the first theory. Wherever you get your news, it likely places a greater focus on the negative stories surrounding the economy. Because of this, US consumers are led to believe that the economy as a whole is struggling.

  1. People just hate inflation.

Nobody likes paying more today than they did yesterday, last week, last month, or last year for the same item or service. I believe there is a disconnect between how economists view inflation vs. how consumers view inflation, which causes even more frustration for individuals. As I pointed out earlier, the rate of inflation has come down drastically from 2022. This is what economists tend to focus on, and they point to this being a positive for the economy. However, this still means that prices are rising. Consumers, I believe, see the cumulative change in inflation being the biggest factor. Axios points out that since the start of 2021, cumulative inflation is around 19%. Meaning, that prices may only be 3.4% higher than this time last year, but they are almost 20% higher than they were three years ago. Consumers still remember how much a coffee at Starbucks cost three or four years ago and stay tied to those prices.

Financial Planning/Investment Strategy Corner:

Alternative investments – Their role in a portfolio:

What is an alternative investment exactly? An alternative investment is a financial asset that does not fall into one of the three “conventional” investment categories – stocks, bonds, and cash. A few examples of alternatives include private equity and credit (investing in or lending to companies not publicly traded on exchanges), venture capital, real property such as real estate, commodities (oil, precious metals, agricultural products), cryptocurrency, and collectibles.

Why would you add them to a portfolio? Alternative investments can be added to a portfolio for a multitude of reasons, but the most common are to either potentially increase return or lower the overall risk of a portfolio with additional diversification. Many of these investments have a low correlation to traditional stocks and bonds, meaning their returns vary independently of what is going on in those markets.

What are the tradeoffs? While alternatives can be a great addition to a portfolio, their tradeoffs must be considered as well. Since many of these investments are not publicly traded, your ability to withdraw money is usually limited to certain times of the year, and you may not be able to take all your money out all at once. Although they can reduce the risk of the overall portfolio, they often have higher risk as a standalone investment. They also often have higher fees and minimums to invest in them. Due to these risks, investors are usually required to meet a minimum amount of investable assets to purchase them, and we typically keep allocations to alternatives to around 10-15% based on the client’s assets and goals.

Quick Hits

Taking your work part-time: Retirement looks a lot different today than it did decades and even just years ago. With people living longer and technology allowing for more remote working opportunities, many pre-retirees are looking at part-time work as a solution to making their money last through their lifetime while still enjoying more recreational time. But how do you sell the idea of you working part-time to your employer? Map it out, make the case, and use your time well, suggests employees that have successfully transitioned away from eight-hour days, five days a week. WSJ - How to Work Part-Time And Still Earn the Money You Need

Quote: “Today’s economy is good at generating three things: wealth, the ability to show off wealth, and great envy for other people’s wealth.” – Morgan Housel

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