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Worried about the economy? Take a closer look.

Lately, I’ve been thinking about why it is so ingrained in our human nature to worry. We’re a nervous species, fearing uncertainty, volatility, and anything that we can’t control. I’m in a business that exists primarily to take financial worry off the shoulders of our clients and manage it ourselves, but we live in a media environment that seeks to capitalize on fear without looking at the greater picture.

Don’t get me wrong, there’s always plenty to worry about in the world. We have two wars, the now regular threat of a government shutdown, inflation, elections — the list goes on. But I’m compelled to remind you that, in terms of what we do at Family Financial Partners, corporate America doesn’t care about any of that stuff until it affects them. Take a look at two recent headlines that show the severe disconnect between how we perceive the economy and what the numbers actually tell us:

  1. US consumer confidence fall further in October
  2. Inflation was flat in October from the prior month, core CPI hits two-year low

Why is it that, with falling inflation, lower costs, and a cruising economy, the average consumer still has a gloomy view of their own finances? Let’s take a closer look.

As I’ve written about several times over the last two years, the job of the Federal Reserve is to slow the economy to prevent inflation. Covid-era legislation pumped a historic amount of money into the economy in order to keep people sheltered, fed, and working. It naturally brought us inflation levels that we hadn’t seen in decades. 

By raising rates and keeping them high, it made the cost of doing business higher. It made the cost of debt higher. It literally slowed the consumer process. You know it’s working because nearly half of Americans are planning on using some kind of payment deferral for their Christmas shopping. If you carry that purchase on your credit card for a couple months and then pay it off, it’s going to cost you more money. The consumer is still spending, but it’s just not as easy as it used to be. 

When we start to see that happening, it says to me that the Fed is winning the war on inflation. At the end of the day, that behavior is the next step in the process — from being able to buy anything you want, to being more selective, to having to finance, to deferring gratification again. 

We don’t like delaying gratification. It makes us feel like we don’t have as many resources available to us as we used to. But in reality, it’s healthy. We’re coming out of an era of free money and becoming operationally more normal. Interest rates were unusually low for a long time, and we’re now correcting.

At the same time, corporate America is correcting, as well. For nearly four years, companies have been incentivized by the federal government to keep as many employees as possible, even while massive leaps in technology like artificial intelligence have made some of those jobs redundant. A lot of businesses have changed drastically in those times. You don’t need as many people to do the same work as you did before 2020. Whether you’re ordering on the screen at a fast food restaurant, using self-checkout, or placing orders on an app, fewer employees are needed to make their numbers. And I do think we’ll see a slight rise in unemployment as a result, but, again, that’s how it’s always been. It seems counterintuitive, but it’s actually good news for the markets.

How about some more good news? Car prices are down. Gas prices are, too. And, importantly, so are energy prices. That’s what powers all of these factories. That’s huge savings for every single corporate business out there, even as they’re battling inflation and rising health insurance costs. Those energy prices aren’t going to show up in this quarter, but if they keep up throughout the winter, we’re likely going to see a lot better balance sheets from non-tech companies that represent middle America.

The reason we’re cruising in our portfolios is we’re in on companies benefiting from these events. Now that the supply chain is fixed and energy costs are coming down, you could see earnings beats galore in the first, second, and third quarters of 2024 that a lot of people haven’t modeled in.

We’re still a fuel-driven world, and if we get the rest of the economy performing better because of lower energy costs, we could have a giant move in the S&P. As always, I can’t guarantee it, but that’s why we’re taking the pain of owning “boring” companies beholden to energy prices. When costs go down, they could have really good years, while the news focuses on inflation and government. 

There’s a lot of negativity out there, but we need to remember that there are a lot of good things going on. We have a very strong economy, which is allowing the Fed to keep rates unusually high in the short term. But in the long term, they’re just taking them back to normal. We all got a deal during Covid, but now that deal is gone. Just because it’s gone, it doesn’t mean there aren’t other deals right in front of you like your stock portfolio and investing in some of America’s greatest companies. 

But we’re still prone to worry. If that’s you, I would love to talk you through it. Contact me or anyone else on our team today, and let’s look at your portfolio together to see how we can mitigate some of that worry. 

It’s what we do.

Article by David Smyth, CLTC, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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