3 Risks that Could Cause “the Avalanche”

Think of an hourglass filled with fine sand.  When turning the hourglass over, grains of sand fall, and a small pile begins to form in the lower chamber.  As each grain touches other grains of sand, critical contact points get created.  The grains will start to accumulate—the number of these critical contacts and interactions between grains throughout the pile increases.  Finally, one grain hits a single unstable contact point, which spreads instantaneously through the pile, causing an entire side of the pile to collapse – an avalanche of sand!
Securities markets and sovereign economies perform with a similar pattern.  As time goes by, stability inevitably leads to instability.  Recessions and market crashes occur, seemingly without warning, and the cause is often minimal, like that last grain of sand. What are some possible looming “grains of sand” in the US securities markets and economy today?

      1. Inflation – persistent inflation at or above 5% has never existed with securities markets as overvalued as they are today. Three things will probably keep inflation high: rapidly rising rents and housing prices, much higher electric rates because of the rapid rise in the price of natural gas, and rising wages, which cause business owners to pass on those costs to consumers.

      2. Rising Interest Rates – the real return on bonds is negative, as the rate of interest that bonds pay is less than the inflation rate. Since investors expect a positive return from bonds, bond yields must rise.  Eventually, the Federal Reserve Bank will need to raise interest rates to constrain inflation (see above).  Rising interest rates kill securities markets.

     3. Diminished Economic Growth – economists, now know, that there is a direct correlation between total debt in an economy and future economic growth.  In the last three recoveries from recessions before March 2020, economic growth has averaged 3.6%, 2.8%, and 2.3%.  This entire period was a time of steadily increasing debt as a percentage of the Gross Domestic Product.  The United States’s rapid economic growth since March 2020, which gets attributed to a significant increase in debt, may soon wane. There is evidence that this may be happening already.

At Benold Financial Planning, we aim to position the investment portfolios we manage to take advantage of a securities market decline.  We analyze each portfolio for opportunities to purchase diverse, low-cost stock and stock mutual funds in a down market.  No one likes a stock market decline.  However, seeing it as an opportunity instead of a disaster can aid in a portfolio’s success.
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  1. CWR Support

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