The world is on fire. Unemployment is growing. The market is going to crash. Interest rates are at rock bottom. Employers are laying off in record numbers. The dollar is going to be worthless in 2 years. We could keep going on and on about headlines that everyone has probably seen over the last several months or, we could try and give you a quick summary of what is actually going on.
Unemployment
In April, the unemployment rate in the US shot up to nearly 15%. This was after months of record lows (3.5-4.5%) so it was a profoundly disturbing indicator the worst was yet to come. However, in early July, the numbers reported a massive drop in unemployment to 11%. This outshot all expectations and was a good indicator that the pandemic was truly the only factor hurting this number and the market was in good health prior. August numbers have yet to be reported but expectations are similar numbers to July.
Takeaway: Really too early to predict long term ramifications of the pandemic but, if a magical antidote arrived today, it is highly likely within a few months we would be back to single digit unemployment numbers. However, the longer it takes to move past the virus, the more at risk many of these jobs are at becoming lost forever.
Interest Rates
This one can get complicated. The Federal Reserve has committed to keeping their interest rate at near 0% until this pandemic is over. What does that mean to you? Well, that really depends on your credit status, your place in life and long term goals. If you are a person with great credit and shopping for a home mortgage, a refinance or a business loan, this is good news as that means a lower interest rate for you. If you have a riskier credit profile or, you are most interested in saving money versus taking on debt, this could be negative. Mortgage rates (30 year traditional fixed ) are at lows of around 3% but on the flip side, savings accounts are paying on average .06% interest which is nothing. Also, your credit card interest rate has also decreased but, there is a chance the credit limit took a dive with the decreased rate.
Takeaway: The movement of interest rates can be beneficial or detrimental depending on your goals and your credit risk profile. Lower rates equate to a good time to borrow if you need it but, you should be careful to not overextend yourself. In terms of savings, you should commit to hunting around for the best cash interest rate options while also considering investment in other channels such as real estate, equities and the like to try and drive a higher rate of return.
Inflation
This is also complex but very much so related to Interest Rates. When cash is cheap and the Federal Reserve seemingly just prints money, it can devalue the dollar. Traditionally, the Federal Reserve would increase interest rates to try and deter inflation from getting about the roughly 2% per year threshold that it has set. Many of you may be familiar with the lovely “cost of living” raises you can earn at work. These are usually in the 2% to 3% range to account for inflation.
So what is inflation exactly? A general increase in prices and fall in the purchasing value of money. Put simply, the $1 you have in your wallet was worth more yesterday than the same dollar is today. As inflation rises, so do the cost of goods such as housing, commodities, food, cars etc. One way to combat the impact of inflation is to buy real property with the idea that $1 today is really only worth a percentage of that same $1 tomorrow. Of course, if your wages do not keep pace with the inflation, there is little benefit to that method of thought. In some countries (Argentina and Venezuela come to mind), hyperinflation exists. This means that the currency fluctuates so often and so much that hardly anyone can keep up. This is how you hear crazy stories of a roll of toilet paper costing someone $20.
OK, so how does this all relate to today? Well, the actual CPI (Consumer Price Index) actually shows a year on year growth of only .6% which is well below the 2% set by the Federal Reserve. However, diving into that number you see that the energy sector has taken a massive hit (-12.6%) due to decreased demand (nobody manufacturing, driving, flying, freighting etc). Food prices have actually risen by 4.5% and all other items by 1.2%. So, take that energy decline out and the numbers look quite a bit different.
Takeaway: Much like unemployment, it is a bit too early to say whether the stimulus packages and low interest rates are going to lead to a major jump in inflation. However, if you are cash rich, as discussed in the interest rate section above, now may be the time to look at investing in assets versus just socking money beyond what you need in a savings account. This could increase your rate of return and protect you against inflation.
Bottom Line
This is hardly an all-encompassing article on the economy nor is it meant to be. There is so much noise and bad news out there, the fundamentals of business and finance still remain. Keep emergency cash on hand (minimum of 6 months of bills), do not bite off more than you can chew in terms of debt, and invest wisely. The US has seen some hard times before and this is nothing new. Prior to this pandemic, the stock market, unemployment and GDP were all seeing very positive numbers. Keep those eyes forward and follow the fundamentals to survive and maybe even thrive, in today’s economy.