Adapted from my letter sent to my private wealth management clients on September 30, 2022.

“We’re going to go ahead and ask you to take your seats and buckle up, as we’re expecting turbulence ahead.”

The announcement on the airplane’s address system was not one I was excited to hear. I was flying to a global research summit hosted by Thornburg Investment Management in Santa Fe, New Mexico, last week, and things were getting rough. I didn’t have real concerns about landing safely, but no matter how many choppy flights I tolerate, my stomach never does well with the turbulence and hard landings are always a bit unsettling.

As I described in my last client letter, the Federal Reserve has been trying to stifle soaring inflation by raising interest rates, and simultaneously aiming to pull off a soft landing and not nosedive the economy into a recession. Higher interest rates make it less appealing to borrow and spend and offer more incentive to sit on money in the bank.

The message from the Fed’s “flight deck” changed a bit last week. They made an expected .75% interest rate increase, but the tone around the messaging was less “soft landing,” and more “we’re bringing this thing down now!” The markets reacted poorly to Federal Reserve Chairman Jerome Powell’s stern message that putting the brakes on inflation is the top priority, even if that means bringing the economy down for a hard landing—including a recession.

Understandably, this kind of ride brings discomfort to many people. It’s not easy seeing account values fall and facing the uncertainty of what comes next.

So, as Powell announces turbulence, and you tighten your seatbelt, breathe deeply, and try to remember, with good planning and patient investor behavior, you will safely arrive at your destination. In the meantime, here are a few points to consider:

Economy: What Does it Mean if we Dive Into a Recession?

A recession may, indeed, be what it takes to break the inflationary cycle. From a financial planner’s perspective—someone who is acutely focused on helping people achieve and maintain financial independence, and not just an investment advisor—I see this as critical. Recessions have been temporary. Inflationary price increases, which drive up people’s long-term cost of living, have by and large been permanent. What has happened historically in recessionary times? Take a look at this chart from Capital Group. The good times far outweigh the bad:

Also, with higher current interest rates, the Federal Reserve and other central banks now have something to work with if and when we are dealing with a recession. Cutting interest rates has historically been one of the most favorable mechanisms the Fed has used to throttle up the economy and boost asset values.

In case you missed it, I discussed economic and market conditions at length with analysts from Vanguard in this recent webinar: Market & Economic Update with Vanguard

Investments: Everything is Falling!

2022 has been a historically bad year for bonds. This is bad in the moment, but actually good long-term news! With higher current interest rates, bond coupon payments are likely to contribute significantly to portfolio total returns going forward. Bond interest payments can add an attractive layer of stable income to portfolio returns, and those payments have been seriously lacking for many years.

Stocks look scary now, but in retrospect, this will undoubtedly look like an opportunity for a cheap ticket to the top, as past bear markets have proven to be. I encourage you to review the charts in my August 3, 2022, letter “Stocks Lead the Way.”

My Financial Future: What Does This Mean for Me?

It is important to remember that in our individualized financial planning work with you, we have planned for these types of bear markets and recessions—many of them, in fact! We did not know the exact time or circumstance, but when using Monte-Carlo Simulations in your financial planning projections, we stress-tested your flight plans with many randomized stormy market scenarios.

I spoke more about financial modeling and Monte-Carlo Simulations in this recent episode of Money Matters.

If you are feeling discomfort and uncertainty due to the market and economic turbulence, you’re certainly not alone, and those feelings are normal. Give us a call, and we can discuss any questions you may have and revisit your financial plans.

Thank you,

Scott