So this note was originally intended to be case study on insurance, but we wanted to wait until after the election hoopla had settled down. And then the election happened. What was supposed to be a brief commentary on the election to introduce the note has turned out to be not so brief, because it’s actually a great jumping off point for some huge personal finance issues like inflation and insurance and taxes and investments and the like. So we’ll look more broadly this month at potential impacts of the election on your personal finances, and then dive a little deeper into insurance with the case study next month.
A lot has been and will be written about the election. They say not to cry over spilled milk, but maybe a little tear is alright over so much spilled ink? Some of it will be spot-on, some of it will be as accurate as the polls were. We have reason for both optimism and concern about a number of issues, but for the time being and the purposes of this newsletter we will restrict our commentary to potential impacts on personal finance.
And those impacts are...probably not much, honestly. At least not immediately. The stock market has been reacting positively - well, ultimately positively. Overnight, after it was clear Trump was going to be elected, the market (Dow Jones Industrial Average) was off 800 points at its lowest. Had the market actually closed 800 points lower that next day, that would have been the largest one-day drop in the market since….ever. Literally ever. Five minutes before the market opened, futures were still off 200 points. And then the market opened up. And as of this writing has been up for seven days in a row. Why? Well, it’s mostly because of an assumption that certain policies seen as being pro-growth will be implemented, namely a lot of spending on infrastructure projects (roads and bridges, yes; water and sewage pipelines, hopefully, because they really need it; improved public transportation, we wish but that’s a pipe dream...pun intended) and reformed corporate tax rates that will allow companies to bring money back into the US (and spend said money in the US) from where it currently lives overseas.
The other assumption being widely made right now is that all this spending (mostly on infrastructure, and paid for by issuing another $500 billion or so of government) will cause inflation to pick up. Inflation is generally a bad thing for bond prices. The Fed will almost definitely be hiking rates next month, and possibly again in March, so bond prices have been falling over the last week as stock prices have been rising.
Now here’s the million-dollar question. Or perhaps better phrased - here’s the comfortable retirement question: How does all this affect you personally? Let’s dive into inflation, taxes, and investments. (We know you all are just beside yourselves with anticipation for that insurance discussion...try and be patient just a little while longer, it’s coming).
What is inflation? Inflation just means your dollar today will be worth less than a dollar in the future, which can be both good and bad, depending on how you look at it. Let’s start with the bad, since that is the more common perception:
- Prices go up. That gallon of milk costs more. Gas costs more. Everything costs more. If you have a lot of inflation and a lot of years, things start to look ridiculous. Example: college costs have been inflating at about 6% a year. So that $20,000 in-state tuition you’re thinking of saving up for your now-5-year-old? Yeah, more like $43,000 by the time that child is actually starting college.
- Interest rates go up. Mortgage rates are higher. Auto loan rates are higher. Credit card rates are higher. It costs you more across the board to borrow money.
And now for the good:
- Your pay (hopefully) goes up. Your social security payments will have an adjustment to keep up with inflation, and maybe your fixed annuity payments will as well (in reality this adjustment will almost always be lower than inflation, but it’s better than nothing - they say while sipping from a glass that is clearly half full).
- Interest rates go up. That emergency fund in the bank might actually, maybe, eventually make you some money! If you’re on top of your financial planning, you can also probably shift back into less-risky assets (like government bonds) and get a half-decent interest rate (as opposed to the nothing you have been getting for the past couple years).
- And the biggest benefit: it’s easier to repay debt. If inflation makes your pile of $1,000 worth less than that in the future, then it also makes your $1,000 of debt worth less in the future as well. Which is nice. And if interest rates are going up, it feels good to be locked into lower-interest debt payments.
Ultimately, how inflation will impact you depends a lot on 1) your current financial situation; 2) overall change in inflation; 3) the speed of that change. If you’re young with a lot of debt, you shouldn’t mind seeing a bit of inflation finally. Fingers crossed that your take-home pay rises along with overall prices, but regardless it lessens your debt burden. If you are retired or close to retirement and living on a fixed income, you really don’t want to see any inflation. Rising prices and fixed income don’t go together very well. And broadly speaking, if you are thinking about buying a house/car/taking out a loan, it would probably be cheaper to get said loan now rather than two years from now if rates are going up.
Having said that, we’re not talking 1970s style inflation here, especially with a Fed that will be hiking rates (this works to slow inflation), so the difference between a mortgage at 4% today vs 5% in a year or two...menh. Not worth overreaching or settling or taking on more debt than you wanted just for a slightly lower rate, in our view.
What are taxes? Money that you could have to spend on yourself that someone else gets to waste. Mostly. Trump has made a big deal out of corporate tax reform, but there haven’t been any concrete proposals on personal tax reform yet. Chuck Schumer just took over as minority leader in the Senate though, so there’s actually a decent chance something might get done on that front. We’ll keep you posted as developments happen, but at the moment we don’t foresee any major changes to your personal taxes.
And as for your investments and the bigger economic picture....again, menh. Here’s our take: markets are anticipating growth. From infrastructure spending projects ($500B or so), from decreased regulation, from money being brought into the domestic economy from overseas (another $500B or so)....but it feels a little bit like grasping at straws. We’re 7 years into a tepid recovery, people have been looking for years now for the next thing they can grab on to as justification for why markets will move higher, Trump gets elected on a lot of promises to create jobs and bring back growth, et voilà! We would just caution that the government has been trying to stimulate growth for the last 7 years (and has spent more than $500B in the process), passed a big “shovel-ready” infrastructure spending deal early on that went swimmingly (nb: sarcasm), and point out that a lot of promises get made during political campaigns.
Maybe, in the short-term, growth does pick up. That would be a welcome sight. But we would again caution that current market levels are extended beyond what even a little pickup in growth would justify. And if the market responds to potential growth by overextending itself even further? Well. Portfolios could look very nice over the next year or two. But the business cycle isn’t going anywhere. There will be another recession at some point. The market will correct. And our forecast of below-average market returns over the next decade or so hasn’t changed.
Something that does concern us: the big, looming, future issue of Social Security viability has not changed at all, though might possibly be brought forward a bit given the potential increase in government spending.
Now, the world won’t get sucked into a black hole if we (the US) spends more than we (the US) takes in from taxes. It’s happened before, temporarily. But the US already carries a fairly decent amount of debt, and in general, bad things happen when the debt load gets too high on a country. This is the kind of problem that will seriously impact your personal finances and needs to be addressed at some point in the not-too-distant future. But as for this election? Menh. Long-term, nothing changes in our outlook. Inflation probably gets back to historical levels. Personal taxes probably don’t change much (though we would certainly welcome it if they did!) Perhaps the market extends a bit from here, but perhaps not. We’ll see how it unfolds.
One final note: generally speaking, we are fans of less regulation. We think it provides more opportunity for you as an individual to be better off, provided you know what you’re doing. Or have a trusted partner that does - which is where we come in. Give us a call.
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