The Investment Management Quandary
“Oh, what a tangled web we weave/when we first practice to deceive.”
Sir Walter Scott
We are currently experiencing several risks that affect investors. The first risk is market volatility. Market volatility can disrupt an investment portfolio by the sheer nature of the uncertain growth of our investments. The second risk we are facing is economic uncertainty. Our economy, in many respects, was severely disrupted by COVID, and our government’s liberal infusion of money into the hands of individuals and businesses. The third risk, that has come about by the government’s attempt to increase our money supply and keeping interest rates at near zero percent, is inflation. These risks combine to thwart our investment planning efforts because even bonds, a major investment management component, are facing losses because of the government’s reversal of liberal cash infusions to a more restrictive tightening of the money supply. Finally, we can also blame the energy reversal campaign of our federal government that has restricted the development of fossil fuels and caused our country to move from one of energy independence to energy dependence.
Many factors can contribute to market volatility, such as economic uncertainty, overvalued stocks, fiscal policy, and interest rates. Unfortunately, we are currently facing all these factors. Stocks, especially tech stocks, are moving into correction territory. Tech stocks have enjoyed a bonanza rally this past year. Many investors have benefitted from this enthusiasm; however, these overvalued stocks are returning to normal valuations, and the downfall is tanking our gains. The S&P 500 is down over 12% since the beginning of the year.
Our economy is also experiencing a logistical quagmire brought about primarily because of the pent-up demand for goods and the decreased labor supply. Naturally, COVID is a large contributor, but one would assume our economic and logistical slowdown should be back to normal by now. However, our labor supply is still low compared to pre-COVID levels. People are just not returning to work. Part of the labor shortage is from those individuals who discovered, during the pandemic, that they should retire, start their own business, or extend their unemployment benefits for as long as they could before returning to work. Our government, without regard to our current deficit, has spent 4.6 trillion dollars as of February 2022 for COVID-19 relief. If you add up the money from all sources, we may discover the total amount of COVID-19 spending is well over 10 trillion dollars.
We are currently facing more negative economic news because of the war in Ukraine and the economic slowdown in production in China because of another outbreak of COVID-19. China is literally shutting down entire cities. We are yet to feel the pain from China’s slower production efforts. Additionally, we are committing more money to Ukraine to aid in their efforts to thwart the Russian aggression against their country. More money added to an already bloated federal deficit and a production slowdown of consumer products may mean additional economic pain to come. This situation will no doubt create more uncertainty and disruption to our already impeded distribution channels.
All the above risks exasperate inflationary pressures brought about by the tightening of the US monetary policy, the global rise in commodity prices, and the unpredictable tensions in Ukraine and possibly between China and the rest of the world. Now, our current administration’s war on fossil fuels has left the United States begging for oil from countries like Argentina and Iran, which are not friendly neighbors. I am a fan of reducing our dependency on fossil fuels, but at what expense? Oil and gas production is the backbone of our current economy. Our mainstream production of goods from factories and transportation uses fossil fuels. We cannot just cut off our dependency like it is just a bad habit without throwing our economy into turmoil. An incremental reduction in fossil fuels makes more sense than just going cold turkey.
With all the economic bad news, are we headed for a recession? Possibly, but the real question is what can we do to reduce the pain from affecting our investment portfolios? All the above risks are working against us. However, we must first remember investing is a long-term event, not just a casual walk in the park. If your goals are solid and you are following the incremental steps suggested by your financial advisor, there is no need to panic. Remember, in the long haul, the stock market has always trended upward. Second, a recession usually suggests declining wages, lost jobs, lower business revenues, and negative economic growth for several months. I do not see these traits. Unemployment is under 4 percent, wages are up, and business revenues appear to be growing. Our economy, as measured by the Growth Domestic Product (GDP), is down; however, the first quarter of the year was affected by the Omicron variant, which put a strain on production because employees were temporarily out of the workforce.
As Christians, we believe, as God’s stewards, that we should manage His money according to His plan. If we focus our eyes on God, then we should not fall prey to the secular world telling us to panic about our investments. We know there are many people in this world, including media pundits, that will try to derail our efforts, but God is always our dependable ally. Our trust in God is our beacon of hope against those who want to steer us away from the main event which is honoring Him.
“Therefore, do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.” (Mathew 6:34 NIV)
“And my God will meet all your needs according to the riches of his glory in Christ Jesus.” (Philippians 4:19, NIV)
Your Faithful servant,