It’s been a couple of rough days for our retirement portfolios, but I find the reasons behind it to be way out of whack from the overall market sentiment.
All year the market talk was about the desire of the Fed to cut rates, so bad news was actually taken as good news because it meant a greater chance of interest rates being cut. Part of the Fed’s goal with raising rates in 2023 was to cool off the very hot labor market. A hot labor market is good, that means people are working and people are getting paid; they’re contributing to society and growing our economy; they’re buying things that others are making and others are making things that people are buying; and we’re all paying taxes on these dollars earned and transactions made, so the gov’t benefits, as well. Simply put, we’d rather have people working than not working. When we have a strong labor market, more people are making money, so that money is going back into the economy by buying goods and services, shopping, entertainment, travelling, and spending their paycheck elsewhere. That spending creates higher prices because dollars are demanding more from and more of these goods services, purchases, travel plans, etc.
Stocks have taken a big dive based on Friday’s job report which showed less than expected job growth totals and a rise in the unemployment rate. But isn’t that what the Fed was trying to accomplish? Didn’t they want to cool down the labor market to help reign in inflation? So, the labor market cooled, and the market tanked because of it. It seems like a very short sighted and extreme overreaction to me, and a reaction that frankly doesn’t make sense. Additionally, now I’m reading about a surprise rate cut from the Fed based on a couple of bad days in the stock market. Again, that seems like such an overblown response. The Fed makes their interest rate decisions on a 6-week cycle, and now investors are so shocked by a couple of bad days that they want a surprise rate cut (which the Fed has the power to do – they can’t only adjust their interest rate on a 6-week cycle; they can do an “emergency cut/hike” – we last saw an emergency cut with the onset of Covid in 2020, and an emergency hike in 1994). In our instant gratification society, we get some signs we want of a cooling labor market and because the market overreacted to it, we now expect an immediate response from the Fed.
The takeaway is this: when things don’t make sense in the market, it’s best to sit tight and just continue working your big picture long-term plan. It’s important not to [over]react to the day-to-day market movements. Instead, we want to look at the overall market health (S&P 500 and Nasdaq are still up nearly 10% for the year) and how it impacts our plans for retirement which could be soon for some, but decades away for others. If you need to discuss your retirement plans reach out to me here.
