It is hard to be optimistic right now. After two years of dealing with the pandemic – and that’s not over yet – we now have to face the reality of a nuclear armed Russia invading Ukraine. And, as if that was not enough, we are now dealing with the highest level of inflation that we have seen in 40 years.
Which makes Webster’s definition of optimism seem downright silly. “Optimism – the belief that this world is the best possible world.” We don’t even know how to define it anymore. Some say optimism died as early as the early ‘70’s, when Look magazine went out of print. Look was known for its short articles with an optimistic slant including one about soon to be available flights from “San Francisco to New York in 75 minutes in a coming 8,000 – mph rocket plane.” A 1971 piece envisioned “a fully formed baby…decanted from an artificial womb.” In 1953, Look proclaimed that polio, heart disease and cancer were being “conquered.”
I prefer the Verywell Mind definition of optimism as “hope in a positive future.” It is not as unrealistic as Webster’s definition or those Look magazine articles, but hope is a good idea to have right now. Maybe we can help.
Let’s start by pointing out that financially, Americans are in pretty good shape. By the end of 2021, total U.S. household net worth had jumped to about $150 trillion, up 14.4% from the year before.1 About a third of that money is invested in stocks, followed closely by real estate. Both of those asset values have increased considerably during the last two years, even while we were suffering with the pandemic.
Further, the U.S. government should be downright giddy about its financial situation. While many lament the trillions that our government owes, few point out the positive side. We all know that inflation is bad for our budgets and for financial assets (more on that below), but it has been a boon to tax revenues for the government. In the past two years, Federal tax receipts have jumped by 35% and are now approaching $4.5 trillion per year.2 You won’t hear the politicians crowing about that but it sure makes it easier for the U.S. government to meet its obligations.
And speaking of the government, the Federal Reserve is optimistic about inflation. They are forecasting inflation to come down to 3.3% by next year. We would consider that to be a positive future, given that inflation is now at about 7%. Stocks and bonds would have a very positive reaction to declining inflation.
The reality is that inflation is as high as we have seen it in 40 years. As a result, bond prices, which go down when inflation and interest rates go up, are down more than stocks on a year-to-date basis. That is something we have not seen in a very long time, but that’s the reality so far in 2022. Now in the long run, bonds are typically guaranteed by the issuer, but in the short run, we are not going to be looking at very good returns as long as inflation remains high.
We hope for a positive future, for a settlement of the Ukraine/Russian war, for the pandemic to leave us and, as your financial advisors, we hope that inflation does decline as much as the Federal Reserve thinks it will.
Song writer Gilbert O’Sullivan wrote “How tragic it would be if here and now Ooh, all optimism disappeared.” We agree, as spring brings eternal hope.
We will be addressing the implications of inflation with our clients during our reviews. If you have more urgent concerns about how inflation may impact you, please contact your financial advisor.
1Household wealth tops $150 trillion for the first time, Jeff Cox, CNBC.Com, March 10, 2022
2Washington’s Record Tax Windfall, Wall Street Journal, Opinion, Tuesday, March 29, 2022
Any opinions are those of Christopher M. Trainor, CFP and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary of statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.