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Financial Health

Thoughts from Investment Counsel Company CEO, BARRON’S, and Wall Street Journal’s Top 100 Independent Financial Advisors

The world has undergone unprecedented changes. Never have stock market gains occurred so quickly as the post-COVID bull market. To the surprise of many, the market continues to shrug off investors’ strongest fears, including inflation, COVID resurgence, Federal Reserve tapering/rising interest rates, and excess retail investment speculation. The S&P 500 continues setting all-time highs making some potential investors so uncomfortable that they have decided to wait for what they believe will be a sizable and inevitable market pullback before they are willing to get in. In contrast, seasoned investors have learned that markets hitting new highs often continue to do so, leading to outsized financial profits.

It may help to clarify what propels some financial markets to move higher during times of elevated uncertainty like now. Many investors hold excess cash due to heightened economic, political and/or financial fears. Investors waiting on the sidelines feel increasingly left out. As prices rise, many capitulate and move some of their cash into the market, despite their fears. This additional demand for stocks continually fuels the market higher. Accordingly, today’s rising stock market is what experienced investors refer to as “climbing the wall of worry.”

One key worry is that investors expect the Federal Reserve to announce at least two interest rates hikes closer to the second half of 2022. A common perception today is that if inflation continues stronger or lasts longer than suggested, the Fed may lose control of the economy and be forced to keep raising interest rates. The Fed has already altered its plan, admitting there may be a need to raise rates sooner than anticipated. The Fed views deflation as a bigger risk to our economy than “transitory” higher inflation. However, not all believe that the near-term surge in consumer prices is temporary. If the last year has taught us anything, especially regarding the outlook for COVID, it is that economists, other experts, and our government all have a hard time consistently forecasting an uncertain future. Interpreting data is a complex subject containing many minefields for experts and amateurs alike.

Today there is more and faster information than ever available to investors. Consequently, it is beneficial to remember that there are many false positives when evaluating today’s unprecedented conditions that lead to investor pitfalls by falling prey to fears that often fail to materialize. So, remember that it can prove costly if you attempt to be an amateur economist or market forecaster. Overreacting to uncertain times or acting overly confident about future circumstances is a risky endeavor. Federal Reserve Chairman, Jerome Powell, shares this view, “This is an extraordinarily unusual time, and we really don’t have a template or any experience for a situation like this.”

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