But what exactly is stagflation? Why does it matter? And should you be worried?

Let’s examine what this economic condition means, look back at the last time it happened in the U.S., and examine how recent policies—especially some of Donald Trump’s—might be steering us in that direction again.

What Is Stagflation?

Stagflation is a combination of two things you do not usually see together:  high inflation and a slow or shrinking economy.

-  Inflation means prices are rising—your groceries, rent, gas, everything costs more.

-  Stagnation means the economy is not growing. People are not getting raises, businesses are not hiring, and job opportunities dry up.

Put them together, and you’ve got stagflation: a painful combination where things cost more, but you're earning less—or worse, out of work. The reason it is so dangerous is because the usual tools to fix the economy can actually make things worse.  For example:

-  To fix inflation, the government usually raises interest rates—which can slow growth even more.

-  fix slow growth, the government usually lowers rates or increases spending—but that can drive inflation even higher.

It is a catch-22 situation that is difficult to get out of once you are in it.

When Did Stagflation Happen Before?

The most famous example of stagflation in the U.S. happened over 50 years ago in 1973 and lasted through the early 1980s.  Here are the main events that caused it to occur:

1.  The Oil Crisis

In 1973, OPEC (a group of major oil-producing countries) cut off oil exports to the U.S. in response to U.S. support for Israel in the Yom Kippur War. This caused oil prices to quadruple, which meant everything got more expensive— including transportation, food, and heating your home.

2.  Printing Too Much Money

The U.S. had been spending heavily on the Vietnam War and new social programs, and the government did not raise taxes to pay for it.  Instead, they printed more money. When more money is chasing the same amount of goods it leads to inflation.

3. Ending the Gold Standard

In 1971, President Nixon took the U.S. off the gold standard, which had kept the dollar stable. This made it easier to print money—but also added to uncertainty and inflation.

4.  Wages and Prices Spiral

As prices went up, workers demanded higher wages.  Companies then raised prices to cover higher payrolls.  This cycle repeated, pushing inflation even higher.

By 1980, inflation was above 13%, unemployment hit 7.5%, and mortgage rates soared to over 18%.

How Did We Get Out of It?

Paul Volcker, the chairman of the Federal Reserve in the late 1970s did something bold:  he raised interest rates to nearly 20% in an effort to stamp down inflation. It worked—but in doing so, caused a deep recession.

In the early 1980s, the economy finally stabilized. The Reagan administration also pushed tax cuts and deregulation, hoping to jumpstart business investment. Over time, inflation came down and growth returned.  But it took over a decade—and a lot of pain—to break the cycle.

Could It Happen Again?

The Federal Reserve has been walking a tightrope: trying to cool inflation without causing a recession. At the start of 2025, the “soft landing” (bring down inflation while avoiding a recession) were in their sites—but many economists worry that the severe policies, enacted by the Trump Administration could reverse the hard earn gains made by the Federal Reserve and make stagflation more likely.

The Impact of Trump’s Policies

Whether you support Trump or not, it is important to understand the economic impact of his policies—past and proposed.  Several of them could increase the chances of stagflation:

1. Tariffs (Trade Wars)

Tariffs are basically a tax on imports. Businesses either eat that cost or pass it on to consumers. Either way, it raises prices—inflation—while also slowing trade and growth.

As most of you know by now, President Trump aggressively expanded his use of tariffs as a central tool of economic and foreign policy.  In February, he reinstated 25% tariffs on steel and 10% on aluminum imports. He then imposed 25% tariffs on most imports from Mexico and Canada, citing national security concerns tied to immigration and drug trafficking as the reason for doing so.  On April 2, branded as “Liberation Day,” Trump announced a sweeping 10% universal tariff on all U.S. imports (the highest in over a century), with higher rates (up to 50%) on products from 57 specific countries, including China.  Just a week later, the administration raised tariffs on Chinese imports to an effective rate of 145%, triggering strong retaliation from China, including new tariffs on U.S. goods and restrictions on rare earth exports. 

2.  Immigration Restriction

Another key Trump policy has been cutting legal immigration, which reduces the number of available workers. While that may sound like it helps American workers, it also means labor shortages in industries like farming, construction, and caregiving.

When there aren’t enough workers, wages go up—but so do prices.  And fewer workers mean less economic output, which slows growth.

3. Unfunded Tax Cuts

The 2017 Tax Cuts and Jobs Act lowered corporate and income tax rates but wasn’t offset by spending cuts.  This resulted in an estimated $2 trillion increase in the national debt over 10 years.

High government debt can make it harder to respond to crises—and over time, it can also put upward pressure on inflation, especially if the government continues to borrow heavily.

Where Are we Now?

It is not certain that we are headed towards stagflation—but we are at a crossroads. Economists are watching closely for signs that high inflation will stick around and growth will decline.   As of April 2025, the U.S. economy is exhibiting signs that raise concerns about a potential move toward stagflation:

1.  Inflation Trends: Short-term inflation expectations have risen to 3.6% in March, influenced by recent tariff implementations. However, long-term expectations remain relatively stable, with three-year forecasts steady at 3% and five-year projections dipping to 2.9% 

2.  Economic Growth:  Forecasts for GDP growth in 2025 have been revised downward, with some projections falling below 1%, indicating a slowdown in economic expansion

3.  Unemployment Rates: Unemployment is anticipated to rise above 5%, up from the current 4.2%, suggesting a weakening labor market

4.  Tariff Policies:  The recent implementation of widespread tariffs has introduced significant economic shocks, leading to increased costs for consumers and businesses, and contributing to inflationary pressures .

5.  Consumer Sentiment:  Consumer confidence has declined sharply, with the University of Michigan's index dropping to 50.8 in April, nearing historic lows. This decline reflects growing concerns about inflation and job security .

How Can You Protect Yourself?

Stagflation is a macroeconomic problem—and is a reminder that we must be prudent with our finances and take measures to protect ourselves from disruptive events.  Some things we can do are:

•    Keep an emergency fund. In times of uncertainty, cash is your friend.

•    Be careful with debt.  Higher interest rates make borrowing more expensive.

•    Diversify investments.  A mix of stocks, bonds, real estate, and inflation-protected assets (like TIPS) can help you weather volatility.

•    Focus on long-term goals. Do not try to time the market. Stick with a plan that matches your investment horizon and risk tolerance.

Final Thoughts

Stagflation is not a guarantee—but as the events of the 1970s taught us, it can happen again and quickly.  With inflation still high and political leaders floating dangerous policies that could restrict growth while raising prices, it is something to take seriously.  The Market reaction last week is an indication of the potential destructiveness of this Administration’s economic policies.

The best thing you can do is stay informed and make smart, steady financial choices:  Do not panic and do not chase trends.

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

The stock market initially surged after the election as investors view a low taxes and business regulations favorably.  However, upon closer inspection, these proposed policies, depending on the degree they are implemented, could actually have a negative impact on the economy moving forward.  Now that the voters have spoken, what does this mean for the economy going forward and what can we do about it?

What Is The Potential Impact of Trump's Economic Agenda?

Taxes

The Federal Reserve began a course of reducing interest rates this year as inflation was finally brought under control.  However, the expected extension of the Tax Cuts and Jobs Act and further corporate tax cuts could potentially fuel increased consumer spending and drive the Markets upwards.  While this is a plus, this could cause inflation to increase again.  In turn, the Federal Reserve may pause their interest rate reduction strategy or even reverse course and increase interest rates once again to reduce inflation. In addition, large tax cuts without a corresponding increase in government revenue will increase government debt which drives up treasury bond rates. This does not bode well for ordinary working people because higher treasury rates results in higher interest rates on business, mortgage and auto loans.

Tariffs

While the economic results were mixed, Trump would like to double down on his tariff policy from his first term and impose a 10% to 20% tariff on all imports plus impose significantly higher tariffs on goods coming in from China.  The goal of this proposed tariff policy is to protect American jobs and industries.  Even if this tariff policy is fully implemented, it is uncertain if these goals will be achieved.  The more likely impact of this policy will be to worsen inflation as the higher costs that companies will incur due to the direct and indirect costs of tariffs tend to be passed down to consumers via higher prices.

Immigration

Labor is the driving force behind economic success in the U.S.  While illegal immigration must be brought under control, a mass deportation policy will leave a void in many sectors of the U.S. economy such as farming, construction, manufacturing, and hospitality to name a few.  A sudden labor shortage would be incredibly disruptive and drive up costs for most goods and services in the U.S. causing inflation to rise.  Furthermore, the price tag to implement this policy would be massive and incredibly complex to execute.  Therefore, most policy experts advocate comprehensive immigration reform instead.  Unfortunately, due to lack of political will, real immigration reform will not happen anytime soon. 

How Can We Insulate Ourselves from Economic Uncertainty?

As I illustrated above, the economic impact of the next president's policies is uncertain.  We may be headed for a stronger stock market due to lower taxes and pro-business environment.  It could also mean higher inflation and consumer prices.  How do we insulate ourselves during uncertain economic times?  In times like these, we should focus on what is in our control and remain true to our basic financial fundamentals.

Maintain adequate Reserves

To protect yourselves from sudden unexpected expenses or loss of income, strive to have an initial cash reserve equal to at least 3 months of expenses or 10% of your gross household income.  If You are a homeowner and still employed, you should strive to build a secondary emergency reserve equal to the greater of 20% of your household income or 2 years of mortgage payments. 

Focus On Savings

While you cannot control how the Markets will perform, you can control how much you save.  Strive to save at least 10% of your gross household income each year.  If you are working, contribute to your company retirement plan (401k/403b, etc.) to the full extent possible.

Live Within Your Means

To protect yourself from having to dip into your savings or incur consumer debt, strive to understand your household spending patterns and live within your means. 

Invest In Your Career 

For those of you that are still gainfully employed, take a step back and review our career and current job skills.  Is your company and / or job stable?  Make a goal to update and / or improve your job skills so that you remain relevant, promotable, and hirable.

Live a Healthy Lifestyle

As the saying goes, "Without health, nothing matters".  Nothing can derail a financial plan faster than long-term sickness or injury.  Each day strive to eat well, exercise, meditate, and relax.  Emotional, spiritual, and physical health are just as important, if not more important then financial health. 

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While there are many factors that impact why prices goes up, in this article I will break down five main factors that have contributed to the rise in inflation, and look at whether the Biden administration deserves the blame or if other drivers were more responsible.

1.  The COVID-19 Pandemic and Supply Chain Issues

Remember the COVID-19 pandemic?  It is easy to forget the significant impact the pandemic had on our lives.  When the pandemic began, governments all over the world shut down businesses, restricted travel, and asked people to quarantine at home. As a result of these actions, economic activity ground down to a halt.  Factories closed, ports backed up, and shipments of goods were delayed. These problems created a disruption in the global supply chain, meaning that goods and materials were not being produced, shipped, or delivered like they usually were.

However, once people started feeling safe enough to venture out and spend money again, demand rose quickly.  Suddenly, more people were looking to buy cars, appliances, and even simple household items that had become harder to obtain.  With fewer products available and more people wanting to buy them, prices naturally went up.

In addition, because of factory shutdowns, business did not have enough goods on hand to sell.  As a result, they had to raise prices to make up for the lack of inventory and cover their own higher business expenses.

There is a case to be made that some companies took advantage of this situation to increase their prices beyond what was necessary, which is called “price gouging”.  Energy, food, and consumer goods companies saw substantial profit growth during this time.  Unique market conditions like limited competition or strong demand, allowed them to increase prices more aggressively without losing customers.

So, while these supply chain issues contributed to rising prices, they were not the Biden administration’s doing.  Countries around the world were impacted by the same bottlenecks, leading to global inflation.

2.  Labor Shortages and Wage Increases

Another major factor in the rice of prices were labor shortages.  Many people either left their jobs during the pandemic or took advantage of unemployment benefits. This trend was called “The Great Resignation."  Businesses struggled to attract and retain workers, so they started offering higher wages to make jobs more appealing.  The higher cost of labor was passed onto consumers in the form of higher prices. 

During this time, the Biden administration did advocate for higher wages in support of workers’ rights.  This is beneficial for workers but can have an inflationary effect. However, labor shortages and wage increases were happening worldwide, so this was not solely the result of any particular U.S. policy.

3. Government Stimulus Programs and Increased Supply of Money

To help people pay their monthly bills during the pandemic, the government sent out several rounds of stimulus checks, increased unemployment benefits, and offered loans to businesses to help them stay open. These efforts began during the previous administration and continued under the Biden administration. The goal was to support people pay their bills, rent, and other financial responsibilities as they weathered the Covid-19 crisis.  But while these payments were helpful, it resulted in pumping a lot of money into the economy.

It is a simple fact that when more people have more money to spend, demand for goods goes up.  However, because of Covid-19, supply chains were still disrupted.  As a result, there were not enough goods available to meet this increased demand. 

Critics have argued that the extra stimulus spending under the Biden administration added to inflation. While it is likely true that the additional stimulus played some role in boosting demand, it is also true that people needed that financial help during a very challenging time. Countries that also provided stimulus packages faced similar inflation issues.  Governments around the world were stuck between a rock and hard place: provide stimulus to people and risk inflation or do nothing and risk a brutal economic recession.

4. Energy Prices and the Russian Invasion of Ukraine

The energy sector is a big driver in inflation, as higher oil and gas prices can make everything more expensive, from transporting goods to heating homes. In 2022, the Russian evasion of Ukraine had a major impact on global oil prices. Russia is a major oil and gas exporter, and the disruption to its supply affected global oil prices significantly.

Higher fuel prices meant higher costs for all kinds of goods and services. If food or goods are more expensive to transport, businesses must raise prices to cover those costs. While the Biden administration released oil from the U.S. Strategic Petroleum Reserve to help stabilize gas prices temporarily, they cannot control global oil prices, which depend heavily on supply and demand in international markets.

Critics have pointed to some of the Biden administration’s energy policies, like limiting drilling on federal land and promoting clean energy, as contributing to higher energy costs. While these policies have an impact, the biggest factor affecting oil prices in the past few years was the Russian invasion of Ukraine and the global oil supply disruptions that followed.

5. Housing Market and Interest Rates

During the Covid-19 pandemic, interest rates were kept very low to encourage spending and borrowing.  Many people took advantage of these low rates to buy homes, which drove up home prices.  But the resulting demand for housing created price surges that impacted both homebuyers and renters.  As housing prices rose, so did rents, which made managing bills even harder on people.

In response to the steep inflation increases, the Federal Reserve raised interest rates steadily over the last couple of years. Higher rates made it more expensive to borrow money, which slowed down inflation but also made housing and loans more costly. 

In this area, The Biden administration bears little responsibility as it does not control interest rates—the Federal Reserve does.

In Summary – Where Does Responsibility Lie?

Inflation over the past four years has been driven by a complicated combination of factors. The Biden administration’s policies have contributed somewhat, but it would be an oversimplification to place all the blame solely on one source.  A global pandemic, international events, labor market shifts, and supply chain issues have also played major roles in pushing prices higher.  

While some of Biden’s policies, such as support for worker rights and stimulus spending, have added to inflation, these decisions were made in response to the unique challenges of the Covid-19 pandemic.   Understanding these interconnected factors helps us see that while government policies can have an influence, a majority of inflationary factors are beyond a single administration’s control. 

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In January of this year, the United States Treasury reached its $31.4 trillion debt limit.  Therefore, Treasury Secretary Janet Yellen asked Congress to authorize an increase its borrowing capability so it could continue to pay the existing obligations of the United States.  She said that if authorization was not given, the Government would essentially run out of money by June 1st.  So far, The House of Representatives has refused to do so.  To emphasize their stance, they narrowly passed a debt ceiling bill in April which would only authorize an increase in borrowing if spending cuts spelled out in their bill was made.  The White House and Congress are negotiating in the hopes of coming up with a compromise deal by June 1st to raise the debt limit and avoid a serious financial crisis.

Why do we have a debt limit?

Prior to 1917, Congress had to pass a new law every time the Treasury Department issued new debt which took time to pass.   When the United States entered World War I the Government needed to borrow a lot of money quickly to fund the war effort.  To simplify the process, Congress enacted a new system where Congress authorized the Treasury to borrow a certain amount of money to meet the Country’s existing legal obligations.  If the Treasury needed to borrow more money than the authorized limit, it would go to Congress and request permission to raise the debt limit.   Ever since this new system was instituted, raising the debt limit has been more of a formality.  During the 20th century the debt ceiling has been raised at least 90 times and has never been reduced. From 2001 to 2016 alone, the debt ceiling was raised 14 times.

What will happen if we default on national debt?

The reason why raising the debt limit has been traditionally a formality is because the consequences for not doing so would be catastrophic to the United States.  If the U.S. defaulted on its existing debt obligations the Treasury would be unable to pay its bills including the interest and principal on Government bonds, Social Security & Medicare payments, and Military Salaries.  In addition, defaulting on the Nation’s debt would cause a dramatic destabilization of the U.S. dollar and global financial Markets. The U.S Dept. of Treasury states: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession”.  

What is causing the current crisis?

Since the end of World War II until 1982 the size of the U.S. national debt averaged $3 trillion. Over the next 20 years it tripled to about $10 trillion.  From 2000 to 2010 our debt increased even more dramatically to $18.4 Trillion.  In 2011, the issue of raising the debt limit became a highly political and partisan affair.   The Republican Party, uneasy about the size of the U.S. debt, delayed authorizing the debt limit and wanted to impose deep spending cuts and caps on the growth of federal spending.  Eventually a deal was reached but it resulted in Standard and Poor’s downgrading the U.S. debt instrument rating for the first time in history.  Ever since the debt crisis of 2011, authorization to increase the debt limit has been difficult and costly to the Nation because the process has become so overly politicized.  Ironically, the debt limit crisis is one that the Executive and Legislative branch has created due to its severely dysfunctional budget approval process.  The dysfunction is made even worse because of the highly partisan nature of our politics today.

How will it impact you?

In 2011 a deal was made just two days before the U.S. would have run out of money.  The S&P 500 reacted to the news by falling 17% in two weeks.  The same outcome or worse could occur this time around if a deal to increase the debt limit is not reached.  Both the White House and Congress remain optimistic that a deal will be made and business will go on as usual.  However, if there is no resolution to the crisis by June 1st, you can expect to see Market instability.  The extent of Market instability will depend on how long the fight to increase the debt limit goes on.  If the negotiations drag on and there is no resolution in sight, the chances of bankruptcies, a recession, and downgrading of U.S. Treasuries increase exponentially.    The loss of global faith in the U.S. financial system will have far reaching consequences.  

As far as you are concerned, be prepared for your long-term investment portfolio to potentially decline temporarily until the debt limit crisis has passed.  We are investing for the long haul so any short-term adverse impact will not be material in the long run.  Money required for today’s lifestyle needs should be invested safely in cash, CD’s, or individual bonds.  As I always emphasize, money you need today should not be invested in the stock market.  

The bigger concern would be a potential recession and a loss of jobs that could result if a resolution is not reached quickly.  Therefore, be mindful of your emergency funds and make sure you have enough cash on hand to carry you through if you are faced with a short-term job loss.

Do not hesitate to reach out and contact me should you have any concerns about your long-term investment portfolio or current cash needs.  Hopefully this political crisis will pass and we will move on to the next one!

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.

What happened at Silicon Valley Bank?

Silicon Valley Bank (SVB) is based in Santa Clara, CA which is the heart of the technology industry.  Most of its customers were venture capital firms with tens and hundreds of millions of dollars at the bank.  Since the start of the Covid Pandemic, SVB invested these deposits in Treasury and other government backed bonds which are considered the “safest” investments because they are backed by the U.S. Government.  When held to maturity, Treasury Bond holders receive their principal bank plus the interest earned.  However since the bonds were purchased at very low interest rates, the value of these investments on SVB’s balance sheet dropped  when the Federal Reserve began to raise interest rates starting in late November of 2022. So at the end of SVB’s fiscal year, they had to report $17 billion reduction on their Balance Sheet.  SVB created fear among some of it’s very large customers when it announced it was raising additional capital.  In doing so, SVB recorded $1.8 billion in losses.  News of this reached some of their very large customers which snow balled into a bank run and by Friday of last week the bank received $42 billion of deposit withdrawal requests.  The bank could not raise the necessary cash to cover these requests and therefore the bank regulators needed to step in and take over banking operations.

What happened at Signature Bank?

Signature Bank (SB) is based in New York and like SVB was a niche bank that served large private clients.  SB marketed itself as a hip alternative to the big banks.  Hence, the banks embrace of new alternative investment strategies like cryptocurrency.  From 2018 to 2022, SB experienced tremendous growth.  This all changed in late 2022 due to the collapse of Sam Bankman-Fried’s crypto exchange FTX that took the cryptocurrency market down with it. SB struggled financially as a result and was already trying to find a buyer when news about SVB spread.  SB customers, hearing of SVB’s failure started making massive withdrawal requests that SB could not cover.  Therefore, bank regulators stepped in and closed the bank.

The FDIC’s Role

The Federal Deposit Insurance Corporation (FDIC) insurance amount is $250,000.  Because account holders at SVB and SB had massive account balances, most of the money held at these banks were uninsured.  To prevent a larger crisis from developing and to calm the Markets, the FDIC, along with Treasury Department, the Federal Reserve, and President Biden ruled that it would insure all deposits at these two  banks regardless of account size.  In addition, the Federal Reserve created a new lending facility called the Bank Term Funding Program.  Banks can use this fund to borrow cash and cover deposit requests.

What Can You Do to Protect Yourselves?

Bank failures in the United States are exceedingly rare but as Silicon Valley Bank and Signature Bank illustrates, they can happen.  Therefore, it is prudent to be aware of the amounts of money you hold at a particular bank.  If possible, maintain balances  only up to the FDIC insurance limits and maintain balances at several banks if needed. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.  Below are a couple of examples to illustrate this point.

Example 1:  John smith is a single depositor with two single accounts at Bank A.  One account has a balance of $100,000 and the other account for $300,000.  He also maintains an IRA that has a balance of $35,00. His total single account balance at the bank is $400,000 and he is insured up to $250,000 and $150,000 is uninsured.  Because his IRA account is also insured up to $250,000, his entire balance of $35,000 is covered.

Example 2:  Jack and Jane Doe are joint depositors at Bank A and as joint holders have $500,000 in combined FDIC insurance coverage.  They have one joint account for $200,000 and another joint account for $400,000 for a total of $600,000.  This means that $100,000 of their joint accounts are uninsured.  In addition, they have  Revocable Trust account  with a balance of $300,000.  The Trust account is insured up to $500,000 so the entire balance is covered.

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This content is developed from sources believed to be providing accurate information and provided by Attune Financial Planning.  It may not be used for the purpose of avoiding any federal tax penalties.  Please consult legal or tax professionals for specific information regarding your individual situation.  The opinions expressed and material provided are for general information only.

Inflation is a naturally occurring phenomenon in a healthy economy as demand for goods & services grow at a faster rate than the supply. However, the sudden rise in inflation today is driven both by unusually high demand and a dramatic decrease in the supply.  With the easing of Covid restrictions, people were suddenly going out and living life again.  Unfortunately, there were not enough workers, products, and fuel to meet this surge in demand.  Russia’s invasion of Ukraine in February added further disruption to oil and natural gas prices.  The result is the extreme surge in the price of goods and services that we are experiencing today.  We all have seen the impact of inflation on everything from coffee, gasoline, groceries, restaurants, hotels, and new & used cars.

Thankfully inflation has shown signs of slowing down as the inflation rate dropped to 8.5% in July.  Economic experts are cautiously optimistic that higher interest rates enacted by the Federal Reserve, easing of supply chain pressures, and reduction in fuel prices will result in further inflation reduction in the months ahead.  However, uncertainties in the oil market, high cost of housing, and wage growth pressures could mean that we will continue to experience higher than normal prices in the months ahead.

The sharp increase in prices has caused me and my family to adjust our spending habits.  Here are a few things we are doing in our household to reduce costs:

We are Eating In not Out

Money spent on food is one of the biggest spending line items on our budget.  In our household, we are eating out (more like ordering to go) at restaurants less often to save money.  We used to eat out quite a bit during weekends but now we are making more of an effort to make breakfast and dinner at home.  In addition, we try not to purchase coffee or other beverages at coffee shops.  Instead, we make coffee at home, fill up our coffee mugs and drink it on the go.  We will also fill up our  water bottles and bring them with us.

We are shopping smartly

We tend to do most of our grocery shopping at Whole Foods or Trader Joe’s.  When we shop for groceries, we are always on the look out for weekly deals and specials.  This has helped reduced our grocery budget especially with meat and fish as these prices have increased significantly this year.  We also try to buy in bulk at Costco when it makes sense. 

When shopping for clothes or shoes, our goal is to never pay full price.  We will shop at an outlet mall or on Amazon versus shopping at a retail mall. 

We are reducing our utility bills

We are mindful of peak electricity usage hours.  Summer has gotten hotter and hotter each year and with that comes the need to run our air conditioner longer and more frequently.  To reduce the cost of electricity, we turn on our air conditioner in the early afternoon to cool the house than leave it off during peak hours.  During peak hours we will use portable electric fans to keep the house cool.  We also will run other appliances like washers, dryers, and dishwashers during non-peak hours.

We have installed solar panels and power walls in our home.  By storing solar power during non-peak electricity usage hours and utilizing solar power during peak electricity hours we have reduced our energy costs pretty significantly.

We are using less water.  In our house, it takes a while for the cold water to turn hot in the kitchen sink and in the shower.  Rather than let that cold water run down the drain, we collect it in a basin and use it to water the plants in our yard.

 We are reducing our streaming services

During the Covid pandemic, we loaded up on many streaming services.  However, with the easing of the pandemic, we don’t have as much time to watch the programs on all of these services.  Because, there are no long-term contracts, we limited our streaming services to the two or three that we use the most and cancelled the rest.  We can always re-sign up if there is programming that we wish to view.

These spending reduction examples that I have outlined will help reduce the sting of inflation and help us save a few thousand dollars a year.  I encourage you to look back at my previous post regarding your 8 Step Summer Financial Checkup and to examine your own household spending habits to see what you can do to lower your spending and increase your savings.

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.

The decline in the Markets can be attributed directly to inflation and the steps being taken to slow it down:  raising interest rates.  In 2021 consumer spending began to steadily rise.  However due to shortages in labor, electrical components, and other materials, supplies of consumer goods could not keep up with demand.  Whenever too much money is chasing too few goods, prices begin to rise and that is what happened in the later part of 2021.  In November of 2021, the annual consumer price index (a measure of inflation) surged to 6.8% which is the largest 12 month increase since 1982.  The energy sector contributed the most to inflation in 2021.  As more people began to get out and drive more, they consumed more gasoline, which lead to increased prices at the pump.  The price of gas rose almost 59% in 2021.  The lack of computer chips has also contributed greatly to the gap between supply and demand.  When the global economy shut down due to Covid-19 in 2020, the demand for consumer electronics shot up while the demand for automobiles went down.  The computer chips naturally went towards home electronics.  However, as demand for automobiles began to ramp up, computer chip manufacturers couldn’t shift gears fast enough and pivot to making chips for automobiles.  This caused the supply chain back up which in turn is driving up the cost of new automobiles.  With so few new automobiles available, people are turning to used cars which is driving up the cost to buy a used car as well.  Inflation as you can see, can be like a snowball rolling down a mountainside. 

To help slow the momentum of this inflation snowball, the Federal Reserve announced that it will begin raising interest rates next month.  Raising rates means the Federal Reserve will raise the federal funds rates which is the rate that is charged to banks for overnight borrowing.  Banks need to have a certain amount of money at all times so they borrow from the Federal Reserve.  Banks in turn pass on their increased costs to consumers by raising the interest rate that people pay for credit cards, auto loans, home mortgage loans, etc.  Markets react poorly to interest rate hikes as it can result in a stalled economy down the road. 

Inflation has impacted the bond market as well.  As inflation rises, the cost of borrowing does also which is reflected in the bond interest rate.  As interest rates rises, bond prices fall.  People who own individual bonds, bond mutual funds, or bond ETF’s have seen a decrease in the value of their investments also. The impact of this decline in value is proportional to the term of the bond.  The longer the term of your bond, the greater the decline in your bond value.  The good news with individual bonds is that if you do not sell and hold them until maturity, you will receive your full principal back plus the interest that you’ve earned along the way.  If you own short term to intermediate term bond funds, they will eventually go back to positive territory as long as you hold the bond fund according to it’s intended time frame.  Remember bond funds / ETFs in long-term investment portfolios act as a diversifier and reduces the overall risk to your investment portfolio.

Besides the impact of inflation and rising interest rates, global tension with Russia and the Ukraine is another troublesome area that the Markets are worrying about.  The cost of a barrel of oil is about $94 a barrel and Russia is the third largest oil producer in the world.  If war breaks out, the flow of oil from Russia can be reduced greatly which will further increase the cost of oil per barrel, which increases the cost of gasoline.  Higher gasoline prices, means higher inflation, which leads to a slower economy. 

In a nutshell stocks and bonds are falling so it doesn’t look like there seems to be any relief in sight.  Furthermore, the threat of war is adding further instability to an already unstable situation.  What are we to do about all of this?  Understand that to be invested in the Markets means to be invested for the long-term.  History has shown that those who are patient will be rewarded in the long run with positive returns.  Understand that Markets will go down.  In times like these Markets can go down quite a bit.  The best thing we can do is to remain calm, acknowledge that there are short-term risks, remain broadly diversified, and stay true to our long term investment objectives.  

Money that is needed today and over the next 5 years are invested very little in the stock market.  The reason we do not invest heavily in the stock market for goals shorter than five years, is because as the chart below shows, significant market declines of 40% or more takes almost 58 months or five years to recover.

 DECLINES IN THE S&P 500 SINCE 1946:

Every time bad things happen it can seem like it’s the only time it has happened to us.  However, as the chart above shows, corrections and downturns do happen quite often.  When it does it does not last long.  With that said, be prepared for continued rough investing waters for the next few months; especially as the conflict with Ukraine is the big unknown variable.   Hopefully the 3rd and 4th quarter of 2022 will bring calm to the Markets. 

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. The opinions expressed and material provided are for general information only.  Please consult your financial, tax, and estate planning professional regarding your specific situation.

I don’t know about you but for me it seems like Election Day was a lifetime ago but it was only 10 days since we voted.  For me, what made it drag on so long was that it took 5 days until a projected winner was named.   The record number of mail in ballots in this election slowed down the counting of ballots so it took much longer to determine the winner than what we are normally accustomed to.

If you have never experienced a U.S. presidential election before it can seem very confusing.  The way we choose a President is unique in the world.   A winner is not determined by popular vote but by electoral votes and whoever receives 270 electoral votes is considered the winner.  But where did the number 270 come from?  Every state is given a certain number of electoral votes based on the number of representatives they have in the House of Representatives plus it's two senators.   There is a total of 538 electoral votes available.  To win the Presidency a candidate must win over 50% of the electoral vote which is 270.  Joe Biden reached that threshold on Saturday, November 7^th and was therefore declared the winner.  

Traditionally, even though the election still has to go through the certification process, the candidate who loses the election would concede soon after a winner is determined so that a peaceful and orderly transition of the Executive Branch could begin.   Unfortunately, that has not happened in the election.  President Trump has not yet conceded and is contesting the results in the Courts.  These lawsuits have almost zero chance of succeeding as there is no evidence of systematic and widespread voter fraud.  So, when will this all end?  

According to election rules, all States must certify the outcome of the presidential election by December 8^th.  This also means that any court challenges have to be settled by this date. (One purpose of the Trump lawsuits seems to be to sew enough doubt in the integrity of how voting was handled and therefore delay certification or even change how Electors will cast their vote.    Again, because there is no evidence of systematic voter fraud, the odds of this happening are close to zero.)  Once the election is certified, the Electoral College will convene and cast their ballots for President and Vice President on December 14^th.  On December 23^rd the President of the Senate (Vice President Mike Pence) will receive the electoral vote certificates and on January 6^th the House and the Senate will convene to count the electoral votes.  The President of the Senate – Mike Pence presides over the process and announces the results.  The candidate that receives at least 270 votes will become the next president.   As of today, Joe Biden is projected to receive 306 electoral votes to Trump’s 232 electoral votes.  In prior elections, this process was a mere formality and ran relatively smoothly but this year is different.  I would expect that each step in the certification process will be contentious and polarized.  But, at the end of the day, Joe Biden will be inaugurated as the 46^th President of the United States on January 20^th, 2021.  At this point the presidential election process will finally be over!

What does the Markets think of all of this?  

Throughout the last 10 days, and in spite of the lawsuits brought on by the Trump campaign, the Markets have reacted favorably to the expected outcome with a Democrat in the White House and Republicans  strongly favored to maintain  control of the Senate (to be determined by run-off election in Georgia in January).  The S&P 500 surged over 200 points the day after the election and has continued to move in a positive direction.  Josh Barro of New York Magazine explained that the positive Market reaction was due to anticipation of an easing of trade tensions with China, no significant change in tax policy, and most importantly, steady leadership in the Executive Branch.   In summary, the Markets reward steadiness and certainty.  

While the Markets view the presidential election positively, it continues to exhibit volatility due to the on-going threat of the Coronavirus Pandemic.  The Markets reacted very positively to the news that the vaccine Pfizer is testing has proven 90% successful in its phase 3 trial. It also viewed President-Elect Biden’s announcement of a 13-member Covid-19 task force positively as a sign that a national strategy to combat the virus will soon be in place.

This Market positivity is being negatively offset by disturbing news that Covid-19 cases are once again skyrocketing.  The United States is the unenviable world leader in number of cases with over 10.7 million people who have tested positive for the virus.  New cases have topped over 100,000 for ten straight days and yesterday, November 12^th, the U.S. reached a record level of reported of covid-19 cases at over 150,000.  Healthcare workers are stretched thin and lawmakers around the country are once again considering lockdowns and stricter restrictions to slow down the spread.  Unlike in March and April, there is no stimulus package to ease the burden of people impacted by the Coronavirus.  The increase in COVID-19 cases and a lack of government response may have a significant on the economy and the Markets.  

In summary, the Markets will continue to experience sharp highs and lows until Joe Biden takes office, a national strategy is implemented to fight Covid-19, and a vaccine is found.   Just today, the S&P 500 rose to a new record over news that Pfizer’s Covid-19 vaccine will prove to be successful.   But hold on to your seats.  The Markets can take a different direction as early as next Monday!

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. The opinions expressed and material provided are for general information only.

The 3^rd quarter saw the Markets make up for losses from March and grew 9.2%.  While this was a slower rate than the 2^nd quarter growth rate of 22%, the Markets are back in positive territory for 2020.  The Markets did show signs of cooling towards the end of September as it took a pause amid the uncertainty of the Covid-19 crisis, the economy and stimulus package legislation.  

The impressive result can be a bit deceptive as a majority of the growth & cooling off can be attributed to large technology companies such as Amazon, Google, Apple, & Tesla. A majority of American small business are still struggling to get by during this crisis.

Can the Markets continue to improve? There are a number of potential headwinds in the 4^th quarter of 2020 that can pose a challenge to continued growth:  economic impact of the Covid-19 crisis, the upcoming Presidential election, passage (or not) of a second stimulus package, and the Supreme Court vacancy.

What can we do?  Control what we can control:  Maintain a balanced and long-term approach to investing, have emergency cash reserves in place, & watch our spending.  Most of all, remain calm, breathe, and stay healthy.

The various ways we can define financial well-being speaks to why so many people think of the stock market and the economy’s health as a gauge for each other. However, the stock market does not define economic health as a whole.  As we’ve seen with the COVID-19 pandemic, stocks are back on the rise, but many individuals - and the country as a whole - are still facing the effects of business closures, record-breaking unemployment rates and more. So why is this?  Below, I outline the major differences between the stock market and the economy and why one can progress while the other tells a different story. 

What Is the Economy?

The economy can be defined as “the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.”  More specifically, one way we can understand economic activity is through real GDP (gross domestic product), which measures the value of goods and services.   As a result, understanding the health of the economy can be thought of in terms of the growth rate of real GDP, meaning whether or not the production of goods and services is increasing or decreasing.²

Economic Health in Terms of GDP and Employment 

Naturally, employment may rise as production and consumption increase. To produce more goods, companies and factories might hire more employees to keep up with increasing demand. With more individuals employed and earning income, more people have money to spend on goods and services- increasing overall consumption. Sometimes, however, GDP can grow but not quick enough to create more jobs for those who are unemployed.

What Is the Stock Market? 

The stock market can be defined simply as “a stock exchange."   It is the buying and selling of ownership shares in a corporation.  The stock market consists of the buyers and sellers (with some buyers and sellers holding more “stock” than others) involved in this activity but does not consist of nor involves every business, worker and family. 

Some of the main indexes used to understand how the market is performing are the Dow Jones Industrial Average (tracking of 30 leading companies), the S&P 500 Index (500 stocks across all industries), and the Nasdaq Composite Index (a dynamic mix of 3,000 stocks across the technology, biotechnology and pharmaceutical sectors).

The Stock Market vs. The Economy in the Context of COVID-19 

The stock market and the economy can display very different pictures of “progress.” One such example is with COVID-19. In regards to the stock market, the major indexes including the S&P, the DJIA and the Nasdaq Composite index all have surged since the market downturn in March.  On the other hand, GDP decreased by five percent in 2020’s first quarter, and as of June 2020, the number of unemployed individuals rose to 12 million since February.  Why is there such a disconnect?

Reason #1

When considering the make-up of the S&P, the DJIA and the Nasdaq Composite index, the stock market isn’t representative of all who make up the U.S. economy. It is composed of larger publicly traded corporations that are  different than the vast majority of small businesses, workers and cities in the U.S.   These larger companies have different profits, greater access to capital,  bond markets and global trade. 

Reason #2

The stock market’s performance as a whole only represents a portion of the U.S. employed households.  A study conducted by the National Bureau of Economic Research showed that the wealthiest 10 percent of households in the United States were in control of 84 percent of the total value of stock shares, bonds, trusts and business equity and over 80 percent of non-home real estate. This was true despite the fact that half of all households owned a portion through mutual funds, trusts or various pension accounts. Therefore, the stock market may not display an equal distribution between those who are benefiting from Market performance and the economy as a whole.

Reason #3

It’s long been understood that at times, investors may be driven by emotional or reaction decision-making. As a result, their behavior may not be mimicking the economy’s current state nor affairs happening in real-time.   There have been large numbers of people who started investing for the first time during this pandemic.  Low interest rates have driven people to invest more in the stock market as they look for more return for their cash.  The rise in the stock market is motivating them to invest even more thus, creating another "bubble" of activity.  People who are underemployed or unemployed is viewing the stock market as a way to make up for lost income - day trading has become much more attractive.  They believe they cannot lose in this environment, thus heating up the Market even more.  Emotional investing results in increased volatility as well.  Last week's sell off of technology stocks like Facebook, Apple, and Tesla was not a result of bad business news.  Rather, it was due to investors feeling that the Markets were getting overheated and sold off companies with the largest gains.  

While the stock market may reflect some changes in the economy and vice versa, the status of one does not show the entire portrait of the other. At times, they can tell entirely different stories, as is the case with COVID-19.   As we deal with the impact of the pandemic, whether or not there will be another stimulus package, global tensions with China, or changes to Federal and Monetary policy, investors can continue to experience a roller coaster ride and further untethering of the Markets and Economy as a whole.

With the expiration of the CARES Act on July 31^st, 2020 and with it the extra $600 a week in unemployment benefits, there could be a significant negative impact to individuals, families, the Economy, and to the Markets.    With Congress unable to agree on new relief program, the Executive Branch stepped in and an Executive Order was signed this weekend that was intended to provide some relief and ease Market tension.  The plan calls for providing $300 per week in unemployment benefits.  States are asked but not required to contributed an additional $100 in weekly unemployment benefits as well.  The enhanced benefit will last until December 6^th, 2020.   In addition, the Executive Order calls for a temporary suspension of the employee portion of payroll taxes (social security and Medicare) for those individuals making less than $100,000 per year through December 31^st.   Employers will still be required to deduct their portion of payroll taxes.   Unless this deferral is forgiven, individuals will have to pay these back payroll taxes on or around January 1, 2021.  There is quite a bit of debate over the legality, cost, and actual economic benefit of a payroll tax suspension.  The main criticisms of the payroll tax deferral is that it does nothing to address the needs of the millions of unemployed people in the United States where help is needed most.  What it does do is add additional burden and cost to employers  who have to execute the program, additional taxes to employees who will have a big payroll tax bill on January 1st, and loss in needed revenue to the Social Security and Medicare Departments.

Economists and Democrats argue that the Executive Order will not be sufficient to provide the fiscal boost required to stabilize the economy and support struggling families.  This is because unemployment in the United States is still at an unsustainable high level and without a significant stimulus relief package, the financial pain that families face will ripple throughout the economy.  Initial unemployment claims this week fell below 1 million for the first time in 20 weeks.  This is well below the initial unemployment claims of nearly 7 million that was filed in late March 2020.  To put these high numbers into perspective, prior to the COVID-19 crisis, the record for initial unemployment claims was 695,000.  The concern among economists are that while the initial  jobless claims that are being filed now, while lower than weeks past, they are still unacceptably high.  Economists also worry that the initial jobless claims being filed now are due to permanent job loss and not to temporary furloughs which could mean a more lasting negative impact to our economy. If no relief program is passed in Congress and these predictions prove true, the U.S. Economy could slide back into a recession and the Markets could suffer further losses.     

I attended a number of economic webinars these last few weeks and the consensus is that the economic recovery will take much longer than the short time frame that was initially hoped for.  This is called a V-shaped recovery where there is a sharp downfall and an equally sharp upward recovery.    The global economy including the United States will probably experience more of an L-shaped recovery where the recovery is long, gradual, and more painful.   The time frame to recovery continues to be dependent on the effectiveness of Federal, State, and Local Government response to the COVID-19 crisis.  Sadly, with the U.S. leading the World in both the number of cases and deaths, clearly the U.S. response has been wholly inadequate.

From a long-term investment portfolio standpoint, we have to be continually be prepared for a bumpy ride as the Markets continue to factor in the impact of the COVID-19 crisis.  In addition, we are entering into a Presidential election cycle.  The winner of the November election will undoubtedly have an impact on the Markets and economy.  Investing for the long-term and staying diversified are two key components to our ability to stay calm during these volatile economic times.  The Dow Jones Industrial Average has lost over 4% since it’s peak in late February 2020.  A diversified index fund portfolio consisting of 50% stocks and 50% bonds has earned a positive 4% return since late February 2020.

I wanted to take a moment to update you on my thoughts related to the coronavirus, its impact on the financial markets, and, ultimately, on your personal financial situation.

A Brief History Lesson 

While the events of the last few weeks have been stressful, keep in mind that the market’s negative response to the coronavirus is nothing new. The below table shows that since 2003, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47 percent.  After 12 months, it rebounded by an average of 17.17 percent. 

^{Source: Dow Jones Market Data, cited on MarketWatch.com February 24, 2020.} 

^{*End of month during which early incidents of outbreak were reported}

Why is it important to take a look back in time? While there are no guarantees the current situation with COVID-19 will follow a similar pattern to the above epidemics, it helps us to better understand and put into perspective that historically over long periods of time, despite an epidemic, stocks typically tend to move upward over time. 

What Should You Do? 

1.  Stay Financially calm

 As the chart above demonstrates, all assets rise and fall in value and the more extreme the swing, the stronger the anxiety. Overcoming this market psychology is no easy feat but learning how the market works can help to reduce stress and increase your ability to “stay the course."

As I have often said, your investments are designed to support your long-term objectives, not today’s needs and therefore, money you need now and over the next 5 years should not be invested in stocks. In situations like this, it is important to have perspective and remember that swift market drops are not unusual. Of course, the headlines are scary and fear of the unknown is scariest of all, but the nature of the market is that it will go up and down.

Investing in the the market is not about winning and losing – it’s about your goals, strategy and time frame. The virus and how it spreads is completely out of our control, but our reaction to the financial markets is something we can control. It’s not fun seeing your portfolio drop, But at the same time, we know market volatility is normal and expected. The key is to tune out the noise and look at the big picture:  the money you have invested in the stock market are for your long term goals and over that time frame, stock markets will rise.

2.  protect yourselves and your family

Until a cure is discovered and / or the virus has run its course, Coronavirus is a part of our everyday life.  What makes this virus so scary is that it is highly contagious.   According to the CDC, the people most at risk are older adults and people with chronic medical conditions like heart disease, diabetes, and lung disease.   Until this crisis is over, here are a few things  that the CDC recommends you should consider doing to protect yourself:

• Avoid close contact with people who are sick.
• Avoid touching your eyes, nose, and mouth.
• Stay home when you are sick.
• Cover your cough or sneeze with a tissue, then throw the tissue in the trash.
• Clean and disinfect frequently touched objects and surfaces using a regular household cleaning spray or wipe.
• Wash your hands often with soap and water for at least 20 seconds.
• Follow public health advice regarding school closures, avoiding crowds and other social distancing measures.

For more information on how to protect yourself go to:  on the Coronavirus go to:  https://www.cdc.gov/coronavirus/2019-ncov/protect/index.html

What Am I Doing For You?

There is lot about the Stock Market that is difficult to understand.  However we can be sure is that on any given day the Market will do one of three things: It will go up, it will go down, and sometimes it will barely move at all. The other thing you can be sure of is that your financial well-being is my primary concern. 

While there is a lot of anxiety surrounding the stock market right now, there is a silver lining.  Situations like this can actually create buying opportunities. As prices drop, I  seek out any opportunities to “rebalance” and shift your asset allocation if it aligns with your long-term goals.  

If you have any questions about your specific situation, please contact me.  I am here to help you get through this period of market instability.

In 1960, Don Draper, is an advertising executive making around $45,000 per year.  He lived in a huge house that cost about $30,000.  He purchased a Cadillac for about $6,000.  This might not seem like a lot of money today, but when you compare it with the 1960 cost of living chart on the left, he was definitely wealthy and living a lavish lifestyle.  It is hard to imagine though that the average salary was $5,1999 per year, rent was only $98 per month and you could go to the movies for $1!

Fast forward to today, Don Draper’s salary would be $303,854[1] his Cadillac would cost $52,000, and his home would be valued in the low millions.  Income and cost of living in the United States have increased tremendously since 1960.

We know that prices go up each year but why?  Over time prices rise due to increased demand for goods and services.  This increase in price is known as inflation.  The percentage increase or decrease in prices over a period of time is called the inflation rate.  As inflation increases the purchasing power of the dollar declines as more money is required to purchase the same goods or services.  Over the last 20 years, our population and economy has grown tremendously.  Naturally, prices, income, and inflation has grown as well.  Today’s prices are 768.16% higher than they were in 1960.   That means it takes $8.68 to buy what $1 did back in 1960[2].  

While the effects of inflation can be clearly seen over a long period of time, the impact on an annual basis can feel small or even insignificant.  Surprisingly, for most of the last 60 years, with the exception of the late 1970’s and early 1980’s, inflation has hovered around 2% to 3% annually.  According to the Beurau of Labor Statistics, over the last 5 years, the annual rate of inflation has been closer to 2%.  To keep pace with inflation, salaries tend to rise at a similar pace, called a “cost of living” increase.  This helps to soften the impact of rising prices.

But with inflation being so low over the last few years, should you still be concerned that it will erode your spending power in retirement?  The answer is yes!  As the last 60 years has shown, inflation might not be noticeable on a daily basis, but over the long-term, inflation has a clear impact on your life and your ability to live comfortably in retirement.  Here are four things you can do to shield you from the impact of inflation.

1.  Stay Invested

Over time inflation does erode the purchasing power of the dollar.  Therefore, your retirement savings before and after retirement, should be invested at a higher rate of inflation so that your money retains its purchasing power in retirement.  This means investing your money in a diversified portfolio of cash, bonds, and stocks.  While investing in the stock market does involve the risk of loss, there is also risks of not investing as well.  Keeping your money in cash means you run the risk of not having enough money to fund your retirement due to inflation.  

2.  Know What Your Retirement Spending Will Be

You should also have a clear idea of what your expected annual retirement expenses will be so you can calculate what the inflation adjusted amount will be when you retire. That way you will have a better idea of how much you will need to save in order to meet your retirement spending needs.  For example, You may wish to retire in 15 years, you believe your basic living expenses to be $50,000 per year today and you expect to live 30 years.   Naturally you would think you would need to accumulate $1.5 million in savings.  However, this does not take inflation into account.   At a 3% rate of inflation, your living expenses in your first year of retirement would actually be closer to $78,000.  You will need to save much more than $1.5 million and / or at a higher rate of investment return to keep up with inflation in retirement.  Having a clear sense of your basic retirement living expenses and the inflation rate will help you better estimate how much you will need to save.

3.  Consider Your Cost of Living In Retirement 

The less expensive your lifestyle in retirement, the better you will be able to absorb the impact of inflation.  If you live in the San Francisco Bay Area, you already know that the cost of living here is one of the highest in the United States.  Therefore, you will need to save considerably more to fund your retirement.  Moving to an area where the cost of living is lower means your retirement savings will go farther.  If you love the Bay area, and can’t imagine living anywhere else when you retire, then you will have to considerably increasing your savings rate and / or reducing your retirement spending to make sure your retirement funds will last.

4.  Reduce Your Debt

To maximize your spending power in retirement, reduce or eliminate consumer debt (credit card, auto loans, personal loans, etc.) by the time you retire.  If you have a high mortgage payment, consider paying off your mortgage or downsizing to a smaller home.  The higher your debt, the higher your retirement expenses will be, and the less capable you will be to weather the impact of inflation in retirement.

HAVE  MORE QUESTIONS ABOUT HOW TO save for retirement?

CONTACT ME TODAY

The Business Cycle

Before we can talk about a recession, it is good to have a general understanding of the Economic Business Cycle.  The Business Cycle is the natural “life span” of an economic period.  All business cycles are characterized by several different stages, as seen below.

1. Expansion

There is an increase in employment, incomes, production, and sales. Debt is low and investments are high in an expansion.

2. Peak

The peak is reached at the height of the business cycle.   The economy begins to stall as it has reached the maximum level of growth. People begin to adjust their lifestyle and expenses due to high prices and inflation.

3. Recession

These are periods of contraction. During a recession, unemployment rises, production slows down, sales start to drop because of a decline in demand, and incomes become stagnant or decline.  Recessions go hand-in-hand with a “Bear” Stock Market (When stocks fall more than 20% from its 52 week high).

4. Trough

This period marks the end of the recession and an economy begins moving into the next step: recovery.

5. Recovery

In this stage, the economy starts to turn around. Low prices spur an increase in demand, employment and production start to rise, and lenders start to open up their credit coffers. This stage marks the end of one business cycle.

Where are we now in the business cycle?

The Great Recession ended in in mid-June 2009 and the U.S. Economy has been expanding ever since.  The current 10-year expansion is the longest in U.S. history.  However, recent events like the seemingly never-ending trade war with China, a slowing down of the global economy, and an inverted bond yield curve (short term interest rates are higher than long term interest rates) are warning signs that the U.S. Economy is at its peak and headed towards a recession. 

How will we know if we are in a recession?

What exactly is an economic recession and how do we know when we are in one?  A recession occurs when there is a decline in one or more of the following economic indicators for at least 6 months:

1.  Real Gross Domestic Product
2. Income
3. Employment
4. Manufacturing
5. Retail Sales

The National Bureau of Economic Research (NBER), a private non-profit group whose board includes economic leaders and Nobel Prize winners.  The NBER analyzes the economic data and they make the official announcement of when a recession begins and ends.  

The difficult thing about a recession is that we could be in one and not yet even know it.  That is because it takes at least 6 months to analyze the economic data before an official announcement comes out.  However, the symptoms of a recession, like a bad cold or flu, can be felt before it actually hits you.  It starts out like a sniffle, then a cough, then a headache, then chills.   All of a sudden you are bed ridden for a few days; or worse you have to see the doctor because you have the flu.

The Great Recession of 2008 started off like a possible cold than turned into a severe economic flu.  The housing market began to slowdown and many believed this was just a sign that the housing bubble was going to burst.  However, this led to the Subprime Mortgage Crisis.  This led to the collapse of a number of major investment banks including Bear Stearns and Lehman Brothers.  This in turn led to a severe decline in the U.S. Stock Market, a global financial crisis, a rise in bankruptcies, and severe unemployment.

Since the Great Depression we have had 13 recessions.  The Great Recession lasted 1 ½ years.  Other recessions lasted anywhere from 6 months to 1 year and 4 months.  While the duration might not be long, the impact to consumers can be significant.  It could lead to a loss of a job, a home, income, and investments. 

6 Tips to help protect you in the next recession

Given the potential severity that a recession can cause, what can you do to protect yourselves and your family from the impact of the next recession?

1.    Make sure you have job security

In a recession, companies might be forced to layoff employees.  How secure are you in your position?  Take steps to ensure that your skills are relevant to your employer and you are continually demonstrating your value.   Just in case, make sure your resume is up to date and keep up to date with the people and trends in your profession.  (Make sure you have a good LinkedIn profile and a solid list of connections within your industry)

2.    Have a sufficient emergency fund in place

Do you have enough money saved in case you lose your job?  At a basic level you should have enough cash to pay your household expenses for 3 to 6 months.  If you have a home, you should increase that cash savings to 12 to 24 months of expenses.   It might take you that long to find a new job if you are laid off in a recession and you want to make sure you can pay your mortgage payments.  In an economic downturn, the last thing you want to do is to tap your 401K plan as they have likely declined in value.  If you take money out, it will take you even more time and money to replenish your 401K to a level that will meet your retirement needs.

3.    Minimize your debts

In an economic downturn you will probably need to reduce your expenses especially if you have a reduction in income or a loss of a job.  Having to pay off credit card debt at the same time will be a drag and limit your ability to spend your income on the things you need most.  Now is the time to pay off your credit cards and make sure you pay them off in full each month.

4.    Take a close look at how much stocks you own

What percentage of your investments are in stocks and will you be relying on that money soon?  If you are 1 to 2 years from your retirement date you should take a close look at your 401K and other investments you are relying on for retirement and make sure money you need for the first few years of retirement are not overly exposed in stocks.  You do not want a sudden decline in the value of your 401K just when you will begin taking money out of it.

5.    Diversify your investment portfolio

The Stock Market by nature is volatile (it goes up and down).  In a recession that volatility is heightened considerably.  To dampen this volatility, invest globally in stocks, bonds, and cash.  Also make sure your mix of these investments matches your risk tolerance (appetite for losses) and time horizon (when will you need to withdraw money from your investments).

6.    Don’t Make Hasty Investment Decisions

As I mentioned above, recessions while painful, they do not last forever.  Your investments will lose money during a recession.  It is important to know that they also go back up after the recession ends.  As the chart below indicates, over time, the Markets have rewarded investors who stay disciplined, focused, and do not stray from their long-term investment strategy. 

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning.  Please consult your financial, legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.

Supporters applauded the move saying that this was a necessary step to alter the trade imbalance between the U.S. and China.  However, it was pretty clear that the markets weren’t happy with the move. The major market indices fell immediately:  The Dow Jones Industrial Average fell more than 550 points, the S&P 500 dropped more than 2%, and the Nasdaq Composite fell around 3%.

The President claims that trade wars are “easy to win”.  The reality is not that simple and the global impact of trade wars is actually very difficult for everyone involved.

To help us understand what is going on and why, I wanted to offer a brief primer on the issues surrounding tariffs, trade wars, and the implication on the economy and to us individually.

What is a Tariff?

A tariff is a tax imposed on a product made outside of one’s own country like the United States.

In theory taxing items coming into the U.S. means people are less likely to buy them as they become more expensive.  The intention is that they buy cheaper local products instead - boosting your country's economy.

What is a Trade War?

A trade war is when one nation imposes tariffs or quotas on imports on another.  The other country retaliates with similar forms of tariffs. As it escalates, a trade war results and the impact is an overall reduction in international trade.

What is Going on Now and Why?

The goal of the Trump Administration is to reduce the $621 billion total U.S. trade deficit and create more jobs in this country.  The largest U.S. trade deficit by country is with China. In 2018, that deficit was $420 billion. The U.S imported $540 billion, primarily in computer electronics, machinery, and clothing.  However, U.S. companies exported only $120 billion worth of goods to China with most of this being commercial aircraft, soybeans, and cars.

Interestingly, much of the goods imported from China are actually made by U.S. companies  Why? Because China can produce consumer goods for much lower costs than other countries can. China has a lower standard of living and can therefore pay lower wages. Unfortunately, because it is challenging for most U.S. manufacturers to compete with China's lower labor costs, they have shifted the cost of labor to China.   While most would agree that “Made in America” would be preferred, in reality American consumers are not willing to pay more.

In addition to reducing the trade deficit, the Trump Administration wants to limit U.S. technology shared with Chinese companies.  China requires foreign companies who want to sell products in China to share their trade secrets. The administration has asked China to stop subsidizing the 10 industries prioritized in its "Made in China 2025" plan. These include robotics, aerospace, and software. Because China’s goal is to be the world's primary artificial intelligence center by 2030, China is unlikely to agree to these U.S. Demands.

The US launched an investigation into Chinese trade policies in 2017 and as a result, imposed a 10% tariff on billions of dollars in Chinese products in 2018.  The Trump Administration justified it’s actions by relying partly on Section 301 of the Trade Act of 1974 to prevent what it calls unfair trade practices and theft of intellectual property.  This gives the president the authority to unilaterally impose fines or other penalties on a trading partner if it is deemed to be unfairly harming U.S. business interests, especially if it violated international trade agreements.

China argues it has strengthened intellectual property right protections and that the U.S. has ignored the effort.  China opposed the action taken by the U.S. saying they represent unilateralism and protectionism.  Therefore, China then retaliated in kind.  

After months of tension between the two countries, they both agreed to halt new trade tariffs in December to allow for talks.

The trade talks unfortunately broke down and the additional Tariffs were imposed on Chinese goods on May 10th.

Larry Kudlow, Senior Economic Advisor to Trump, justified the strategy on a recent interview, “it is worth bearing the short-term pain of a trade war to force China to open up its vast economy to American firms on a fairer basis”.

Is the Pain of a Trade War Worth It?

Initially, it may work but in the long run, a trade war actually costs jobs because it depresses economic growth for all countries involved.  Trade wars can also trigger inflation because they end up increasing the prices of consumer goods imported from that foreign country.

Economic experts say that the Trump Administration’s attempts at trade protectionism will hurt the U.S. economy as it will lead to an increase in the price of goods like cars, computer chips, and heavy equipment. Companies will have to cut jobs because the cost of production using local materials will be too high to be profitable. U.S. exporters of things like agricultural products and auto parts will suffer as foreign markets for their goods shrink under retaliatory tariffs.

China’s tariffs on U.S. goods exported and sold in China will make them more expensive. U.S. exporters may have to cut costs and lay off workers to remain competitively priced. If they fail, they may cut costs further or even go out of business.

In the long term, a trade war with China will slow economic growth. They create more layoffs, not fewer, as foreign countries like China retaliate.

Over time, trade wars by its nature weaken the protected domestic industry.  Because without foreign competition, companies within the protected industry lose the incentive to innovate. Eventually, the locally made product would decline in quality compared to foreign-made goods.

How Does a Trade War Impact the Consumer?

Here’s how the current tariffs on goods coming into the US from China work: taxes are applied on goods coming in, and American importers are the ones responsible for paying them. Some absorb the cost; most pass them onto the consumer.

"If the U.S. imposes a tariff on Chinese televisions, the duty is paid to U.S. Customs and Border Protection at the border by a U.S. broker representing a U.S. importer — say, Costco," Howard Gleckman, a senior fellow at the Urban Institute-Brookings Institution Tax Policy Center, wrote in September. "The Chinese government pays nothing."

"When tariffs are levied at 10 percent, many firms choose to absorb the cost in their margins," said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. This can be done by settling for lower profit margins or cutting costs in some fashion.

"However, with tariffs now scaled up to 25 percent, firms will inevitably pass on some or all of the increase to U.S. consumers," de Bolle said. "That means that U.S. consumers could in some cases pay 25 percent more for a given good than they did before."

“Our results imply that the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being born by the consumers of imports,” a study published in March by economists from the Federal Reserve Bank of New York, Princeton University and Columbia University concluded.

In summary, economic experts agree that trade wars are not “easy to win” and in fact they are difficult and costly for all countries involved and their citizens.  There are no winners only losers in a trade war.  The markets understand this so expect a period of increased volatility until the trade dispute between the United States and China is resolved.

Have any additional questions surrounding tariffs? Or want to chat about other pressing financial topics? I'm here to help! 

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning.  Please consult your financial, legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.