2022 has brought several financial concepts and words to the surface! Some of these concepts we haven’t seen in more than 50 years, but they are making headlines and could potentially impact our financial future. At Zephyrus Financial Services, we are dedicated to educating our clients. We think it’s time for a quick financial vocabulary lesson on some of the top buzzwords we’ve heard a lot about this year from clients and in the news.
Traditionally, a recession is defined as two quarters in a row of economic contraction. By definition, we are most likely in a recession. However, many economists do not think the standard definition of a recession applies in this case. Between the government issuing stimulus payments and dropping interest rates during the pandemic, we experienced two years of growth, but now the Federal Reserve is purposefully trying to cause contraction and slow down the economy to combat inflation. Their goal is to have a “soft landing” as the economy handles the tightening and be in a recession for a few quarters.
Inflation represents the buying power of the U.S. dollar changing over time. When inflation goes up, the buying power of the U.S. dollar goes down and vice versa. We are experiencing high inflation for a number of reasons:
- There is a huge demographic shift in the U.S. as the baby boomer generation retires and drastically changes spending habits.
- The government purposefully shut down the economy to combat COVID-19 and kickstarted it with stimulus payments.
- The majority of the stimulus money was borrowed in the form of treasury bonds and not borrowed from foreign governments.
- Additional stimulus measures allowed people to borrow money for almost nothing, allowed companies to expand and hire and provided extra spending money to almost everyone.
Put all that together, and prices go up as demand outpaces supply. In August, Consumer Price Index numbers showed inflation decreased slightly, hinting that the Federal Reserve’s actions are working.
When high inflation, high unemployment and slow economic growth happen at the same time, the economy experiences stagflation. Stagflation is a rare occurrence because it defies the logic of basic economics. Traditionally, economic growth occurs when prices go up and unemployment is low, because the demand for goods outgrows supply. Stagflation is the opposite. Lack of supply increases prices, but people can’t keep up with the skyrocketing costs in a high-unemployment labor market, leading to a stagnant economy.
We are experiencing two of the factors for stagflation: high inflation and slow economic growth, but we have historically low unemployment right now. So, why are we talking about stagflation? It is possible for a recession to take the place of high unemployment in the recipe for stagflation. Additionally, inflation appears to be topping out, but it’s still at an elevated level. The U.S. may experience stagflation, but it would be a manageable level and not out-of-control stagflation like in the 1970s.
A bear market is a prolonged down market. A bull market is the opposite, a prolonged up market. Both bear and bull markets are normal events that can’t be avoided. Bear markets can cause fear amongst investors, and fear can be a powerful emotion. We often see people wanting to sell when their fear grows too big.
The truth is that a bear market presents investors the opportunity to buy investments at a lower cost. The old adage goes, “buy low; sell high.” Unfortunately, when investors let their fears influence their investment decisions, they do the opposite and lock in losses on their investment. Some people want to chalk it up to “bad luck,” but the reality is they give into their emotions.
If you feel an inkling of fear when it comes to your investments or any emotion for that matter, make sure you’re meeting with a financial professional. They can explain what’s happening with the market and help create a plan to withstand uncertain times on Wall Street.
Strength of the Dollar
The strength of the dollar refers to the stability of U.S. currency. The U.S. dollar tends to be much more stable than other currencies because the value of the dollar is not directly controlled by the government. The government can enact policy that impacts it but cannot directly change it. The U.S. Constitution prohibits currency manipulation.
Because of its stability, a lot of global commodities are traded in U.S. dollars. During the pandemic, the U.S. dollar began to look better and better due to its stability compared to other currencies. In mid-August, the U.S. 10 -year Treasury Rate was 2.78%, the Japan 10-year Government Bond was 0.17% and the Eurozone Central Government Bond was 1.71%. The U.S. rate has attracted a lot of foreign interest. Since these bonds are trading in U.S. dollars, that also causes demand for U.S. dollars to increase.
With so many terms flying around lately, it’s easy to get caught up in the buzz and make snap decisions with your money based on what you read online and see in the news. It’s crucial to have a full understanding of these large financial concepts. Make sure you are working with a financial advisor to navigate major financial shifts and prioritize building your financial future regardless of headlines. To learn more about how these financial events impact your finances or start your retirement planning journey, set up a meeting today, and don’t forget to follow us on Facebook and LinkedIn.