Your Financial Future: Rocky road ahead for economy
As we approach the end of September, there are many concerns in the economy. On Tuesday, the Dow shed nearly 400 points, which was its worst day since March. For the month, the Nasdaq is down nearly 7% and the S&P 500 almost 5%. There are many facts contributing to the market concerns.
We are only days away from a possible government shutdown. A handful of super-conservatives are holding up any possible compromises. If we shut down, government employees will get delayed paychecks and many other benefits will not be paid. Moody’s Investors Services said, “A brief U.S. government shutdown probably wouldn’t hit the economy hard but would be credit negative for its debt.” This means the cost for government borrowing could become more expensive. A long-term shutdown could be very hurtful to the economy.
Because we were experiencing runaway inflation, the Federal Reserve has been raising interest rates. While it paused hikes this month, the Fed warned it could resume increases. Many stock market gurus have been hoping that they would start to cut rates. This is not likely to occur anytime soon. JP Morgan Chase CEO Jamie Dimon is warning that interest rates could go up quite a bit higher. He said, “I am not sure if the world is prepared for 7%.” Current rates are around 5.25 to 5.5%, so 7% would be significantly higher.
Higher interest rates would cost the government much more in interest expense on our exploding deficit. We do need to deal with this overspending, but this is something Washington has avoided and does not even want to discuss. Higher interest rates are slowing home sales, as would be expected. August home sales were below expectations and were down 8.7% in July.
The ongoing autoworkers strike could disrupt supply chains for both parts and new car inventories. Similar shortages were a major impact on inflation. As all drivers know, gasoline prices have been rising rapidly. Some of this is because Russia and Saudia Arabia have cut monthly production supplies. WTI, which is Texas-produced oil, has gone up 26.1% since the beginning of the quarter. Higher fuel prices increase the cost of all things we buy at stores since this merchandise is transported by truck.
Consumer confidence has continued to go down. This is important because two-thirds of our economy is consumer spending. Consumer debt has been increasing along with rising delinquency rates. The stock market has been volatile and supposed safe money in bonds has been negatively affected by rising interest rates. The biggest bond funds are experiencing losses in value.
Many of these factors are oblivious to many investors. There are other concerns that people are not as aware of. Corporate debt restructuring is going to become very important in 2024. Higher interest rates will make the cost to refinance this debt expense and hurt profits. In 2024, $903 billion comes due, up from just $204 billion this year. In 2025 it goes up another 42%. There are also mortgages coming due on major office buildings that are now facing vacancy issues from an increase in work-from-home employees.
Just as Washington can’t comprehend the deficit crisis, many investors think market returns will continue at unrealistic rates. Make sure that your family’s plan is based on a more realistic outcome.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”