Sunny Economic Times Mean It’s Time To Plan for Rain

QUESTION:

Soaring government spending! Tax increases! Inflation! I’m worried the economy will implode; what should I do to protect my nest egg?

ANSWER: 

Don’t worry … plan. While it’s possible that the current policy environment will lead to inflation and lower earnings growth, creating tough times for stock markets, prudent investors can build portfolios resilient to these pressures over the long-term.

A major tax-and-spending bill was proposed in Congress earlier this month, but it was just that—a proposal. At this stage, it’s difficult to determine the impact of specific parts of the bill, but it’s a safe bet that taxes are going up, and so is government spending.

More spending stimulates the economy, but higher taxes slow it down. Higher interest rates and inflation—two more economic wet blankets—are likely to accompany all this new spending. Could all these factors lead to slower growth? Yes. Does slower growth put the economy at more risk of a recession? Yes. Will any of these actions cause an economic implosion? Probably not.

Financial markets are a little different story. Inflation and interest rates go straight to the heart of investment valuation. If these go up, valuations come down. Right now, we have a market priced for high earnings growth, low interest rates and low inflation. The earnings growth might happen, but it is at risk because interest rates are almost certainly going higher, as is inflation. In other words, there is a very real risk that investors will see a market correction, or even a crash, in the not-too-distant future.

As you plan, remember there are no guarantees as to how the economy or markets will react to new government policies. The social and economic forces impacting our economy go way beyond Washington, D.C. They include technology advances, foreign relations, energy prices and social preferences. Just as we prepare for the possibility of a downturn when everything looks sunny, we also need to prepare for things to go well as storm clouds gather.

Now is a good time to carefully examine your tolerance for short-term investment risk versus your desire for long-term gains. It’s important to work with your AMG advisor to make certain your portfolio is positioned for financial security over the long haul.