Your Financial Future: Paying the piper
It was a year ago when the DOW reached the bottom plunge because of the COVID-19 pandemic.
From its mid-February high, it dropped 34%. This was the fastest decline in history and temporarily stopped an 11-year bull market. It only took six months to match the February high and it is now up 75% from the bottom.
Both of these facts are very unusual.
They may have some people believing that the stock market can only move in one direction. However, history tells a different story.
One way to describe the market might be walking up a pair of stairs while playing with a yo-yo. The general direction is upward, although there are a number of up and down cycles. If your timeline is long enough, the stock market has often produced the biggest returns. If you need to withdraw money during a downward cycle, there may be problems.
The rapid recovery and rise after the pandemic started was caused by an unprecedented amount of both fiscal and monetary stimulus. The Federal Reserve cut already historically low interest rates to nearly zero. They promised to ignore inflation and support the corporate debt market. They made an almost unlimited amount of liquidity available.
Congress spent massive amounts of money that it did not possess to jump start the virus-fueled economic shut downs. There have now been three direct-to-citizen cash stimulus and trillions of dollars of other spending, on many things not even related to the virus that continue even though the economy is growing. How long can this artificial environment last?
Now we are being told that the almost $2 trillion spent on just the last stimulus package is not enough and we should spend another $3 trillion on infrastructure. If we ran our households like this, we would all be bankrupt. To see how fast the debt is growing, visit the website www.usdebtclock.org. It is scary.
We are now hearing cries to raise taxes on the rich. The problem is there are just not enough people in this group. The place that is the real target, and where the money just happens to be are IRAs and 401(k)s. That is the only place for Washington, D.C., to find the money. Taxes will go up, but not only for the rich.
Inflation has to pick up dramatically at some point. We are already seeing this in gasoline and lumber prices. Anyone who goes shopping seems to see more inflation than official statistics. As inflation increases, the Fed will have no choice but to raise interest rates. This will not be beneficial to an already high valuation stock market.
We need to reward good financial behavior. Those who saved paid their taxes and their debts. Most people did not borrow from the government or paid back loans as promised. I often hear from people, 鈥淪hould I keep paying and be penalized when others don鈥檛?鈥� That is a legitimate question.
Modern medicine is overcoming the tragic year. That government spending was necessary and prudent. We developed vaccines in record time and secured the supplies necessary. We can see the light at the end of the tunnel, although we are not quite there yet.
America is the strongest country in the world, but we need to make intelligent decisions and not pretend that we don鈥檛 have to pay the piper someday soon. Reward good behavior, not bad. Realize that inflation and taxes must go up. The stock market will have a longer-term bear market at some point.
You worked hard all of your life for retirement. Make sure that you are ready for what could be the perfect storm.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.