A Timeless Market Forecast

While there is controversy over the exact origins of the following quote, it has been attributed to the legendary American financier and banker, J. P. Morgan (1837-1913). Supposedly a brash young man asked this Lion of Wall Street what he thought the stock market would do near term. Morgan declared with unabashed certainty, “It will fluctuate, young man. It will fluctuate.”

And so it has, and so it will, sometimes to heart-racing extremes, constantly confounding forecasters. Yet the stock market endures as a useful wealth-building tool integral to a deliberate and patient long-term financial plan.

Forecasters, financial writers, economists, government policy formulators, and investors seek to fathom what the post-pandemic so-called “new normal” will look like and how we will know when we get there. Mr. Market obsesses over Federal Reserve officials signaling that interest rates may rise sooner than anticipated due to a rebounding economy and increasing inflationary pressures. Costs for many things have soared when compared to reduced or lower prices of a little over a year ago when Covid-19 fears largely brought much buying activity to a relative standstill. Unparalleled federal monetary stimulus, record borrowing and printing of money have added fears of “unanticipated consequences” to the guessing game mix.

You are experiencing rising costs at the grocery store, gas pump, and elsewhere as the buying power of your dollar shrinks. Cost-of-living inflation is a constant reality that demands patient investment and wealth-building strategies. True deflaltion is a rare occurrence, normally associated with market crashes and depressions. The consumer price index is up 5% as of May, 2021, compared to last May when many of us were shut in midst the pandemic as shrinking demand depressed prices. Some government officials and economic pundits call rising prices “transitory.” One can hope, but with the “price genie” out of the bottle, we can only wonder what will stick and what will not.

A 15-day personal road trip to Florida mid-June illustrated the madness of crowds and resulting inflationary pressures. During this trip over the ides of June, we found that top hotels were crowded with price increases to match. I-75 and other major highways were crash-strewn racetracks, especially in stormy weather. Short-staffed restaurants were jammed and prices were rising. My son’s family stood in line for over three hours at the Miami International Airport to get a not-so-cheap rental car pre-booked months ago. American Airlines announced significant flight cancelations due to crew shortages and other factors related to surges in demand. Interruptions in global supply chains and ocean shipping backlogs are pressuring prices. A worldwide shortage of microchips plagues production of computers and related equipment, such as smart phones, cars, and a wide range of items. This, in turn, creates production delays with concomitant price pressures. Labor shortages and questions about “returning to the office” fulltime are precipitating increased wage costs and other conundrums. How much of today’s abnormal will persist as part of the new normal?

Those with money are spending it. Witness soaring prices for homes, and a resurgence in travel. Folks in Florida report a boom in the buying of boats and other toys. How long this will last is guesswork.

The economy is recovering. As to a market outlook, expect more ups and downs, as stocks overall are not cheap and trading is free and easy. If you own solid companies and have ample cash liquidity to handle routine needs and emergency surprises, hang in there. If you’re dollar-cost-averaging monthly into retirement or other nest-egg portfolios, maintain discipline. Success overall in the market for all but adroit traders is a function of time, not timing.

Try to factor rising inflation into your long-term plans. At 3% annualized inflation and a 20% overall marginal state, local, and federal tax bracket, your “break-even” and zero real rate of return adjusted for taxes and inflation is 3.75%; at 4% inflation, 5.00%.  Cash and bonds are useful buffers during bouts of market stress, but they are unlikely to keep pace with inflation and taxation over time when it comes to preserving or growing buying power.

Expect taxes to rise, and not just for the wealthy. Demands for more “free benefits” and market price pressures impact federal, state, and local city and county costs, and taxes and user fees are likely to increase. Tax-wise investing and spending strategies are essential to successful wealth building and preservation efforts. A review of “What if?” contingency plans for you, as well as any adult children still dependent on you, is advised. Parents of suddenly 18-year-old children, who now are adults under the law, are startled to realize that powers of attorney for health care and assets are required in case of serious injury or illness. As people emerge from COVID time-out, the accident rate is soaring.

The ides of June are behind us. Enjoy your summer. Plan well!