We’ve been writing a lot this year about girding oneself for heightened uncertainty, heightened volatility, and market returns far below what many of us are accustomed to. This year has certainly provided a good measure of those PLUS additional doses of geopolitical conflict and supply chain problems just to round out the financial anxiety. As this has been happening, we have been emphasizing the importance of a good financial plan and its role in providing restful sleep DESPITE all the uncertainty. From our perspective, this is the most important thing we do: create plans for our clients with goals and objectives in mind that we have high confidence can be achieved, even while the storm is raging.
This past week, two high profile business titans sounded the economic alarms: JP Morgan’s CEO Jamie Dimon, and Tesla and SpaceX CEO Elon Musk. Here’s what they had to say:
“You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane,” Dimon said Wednesday at a financial conference in New York. While conditions seem “fine” at the moment, nobody knows if the hurricane is “a minor one or Superstorm Sandy,” he added. “You’d better brace yourself,” Dimon told the roomful of analysts and investors. “JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.” Source CNBC.
Elon Musk told Tesla executives to pause all hiring worldwide because he had a "super bad feeling" about the economy and needed to cut 10% of the company's workforce. Source Reuters.
Here’s why their comments matter: 1) Dimon and Musk are smart and informed, 2) They have inside positions that provide early indicators that we cannot see, 3) They employ huge numbers of people, and 4) They control large capital bases. If these two see it, you can bet more CEO’s who are less vocal see it too.
What’s the source of the worry? Changing Fed Policy in response to inflation is the primary driver. We’ve been writing about this since the beginning of the year too. The Fed is just about to commence reducing its nearly 9 trillion-dollar balance sheet. This plus its planned interest rate increases are necessary to bring down inflation. The effects are unknown, and we will be learning about them in real-time as they unfold.
So what should you expect and what should you do? Our advice is to mentally prepare for bad outcomes in financial markets. To gain confidence you are on the right path, revisit your financial plan. Question the assumptions you are making in that plan, and whether your plan can withstand the potential for substantially negative outcomes. If you find that your risk tolerance or circumstances have changed to warrant a change in your risk posture, steps can be taken to reflect the new information. This exercise will help you to work toward peace of mind as things unfold in the coming months.
All hope is not lost either. Dire predictions may not come to pass. We may not enter recession or, if we do, it may not be severe. We simply don’t know. At this stage the earnings outlook for corporate America remains good. Also, we continue to look for ways to adjust the investments we make on your behalf to be aligned with current conditions. We will continue to be vigilant in these efforts as well. In the final analysis, this episode of heightened uncertainty and volatility will pass, and we will be back on the American path of economic expansion, innovation, and prosperity.