Many consumers are reconsidering their investments in the wake of surging inflation, rising interest rates, slowing economic growth and continued stock market volatility.
“We hear from our clients, and they are understandably concerned,” said Clint Snead of Box Financial Advisors in Grapevine. “The economy can look a little scary.”
PNC Bank economist Gus Faucher said that while the U.S. economy continues to expand, recession risks have increased.
“The risk is that Fed interest rate increases to reduce inflation could lead to an outright contraction in economic activity, either in late 2022 or sometime in 2023,” he said.
Inflation has also increased, with consumer prices up 8.6% in May, according to the Bureau of Labor Statistics.
Inflation is now a top concern for most workers, according to a survey from Schwab Retirement Plan Services. The Westlake-based financial services giant’s annual nationwide survey of 401(k) plan participants finds that workers rank inflation (45%) ahead of other obstacles, including keeping up with monthly expenses (35%), stock market volatility (33%), and unexpected expenses (33%).
“Workers have been through a lot over the past two years, and it’s only natural that recent economic and geopolitical turbulence has continued to fuel financial concerns,” said Catherine Golladay, head of Schwab Workplace Financial Services.
Snead said his firm had been building investment plans that account for inflationary pressures to return for some time and passing that advice to their investment clients.
“Just with population demographic changes, with the Baby Boomers retiring, we felt like there was going to be a workforce shortage in middle to upper management,” he said.
That was only exacerbated by the pandemic and the supply chain issues, he said.
“We didn’t foresee those things, but we thought inflation would return,” he said.
Because of its focus on inflation, Snead said, the firm began investing in areas that are more immune to price increases.
“We changed our philosophy a long time ago and try to help clients invest in things that we thought would maybe be less correlated to just the traditional markets, and then be able to capitalize a little bit more from asset classes that do better in higher inflationary periods, or maybe preserve value more,” he said.
The firm didn’t invest in things like gold or cryptocurrency, Snead said.
“We’re those guys that try to help our clients go out and buy music royalties and farmland, things like that that aren’t as impacted by inflation,” he said.
Those investments in farmland didn’t look that good until about October of last year.
“All of a sudden, farmland, just in the last quarter, has done almost a full 20% (appreciation) while the markets are down,” he said.
PNC’s Faucher said that while economic growth slowed in the first half of 2022, the U.S. economy is not in recession, though the possibility of a recession is still possible. .
Patrick Means, vice president and branch manager at Charles Schwab’s Dallas branch, said that because of the economic slowdown, some investors are looking to move to cash.
He suggests they consider moving to two- or three-year Treasuries instead.
“It’s not our preferred strategy, but we know a lot of investors likely don’t want to come off the sidelines (back into traditional markets) until they feel more confident about inflation declining,” he said.
Investors can consider many common bank and investment holdings to consider as short-term interest rates trend upward, Means said.
“Many of these may be positively affected by rising interest rates,” he said.
He noted bank saving rates will generally rise and that financial stocks can be positively impacted by what banks can charge on loans. Short-term bond prices may drop as inflation increases, he said, but those price declines tend to be nominal.
“While history can be a guide for how investments may perform when short-term rates rise, remember that there are no hard-and-fast rules when it comes to investing in short-term bonds,” he said.
Snead said when the economy is volatile, many clients want to move to investments like gold and cryptocurrency that some think are more stable. He advises against those options.
“Sometimes these are the individuals that are worried about stock market volatility, but gold, for instance, is seven times more volatile than stocks,” he said. “They will talk about stock market volatility, but they don’t really understand the volatility that is in those other markets.”
Bob Francis is business editor for the Fort Worth Report. Contact him at bob.francis@fortworthreport.org. At the Fort Worth Report, news decisions are made independently of our board members and financial supporters. Read more about our editorial independence policy here.