How do you invest your money in cases of inflation and recession? | leadership

The news points to a possible recession in the markets and the economy, but long-term investors can overcome it with a little luck and a lot of planning.

In this article, published by the American newspaper “The New York Times”, author Jeff Sommer says that the news that has been circulating about the inflation rate for months has worsened in recent times.

The US government said last Wednesday that the consumer price index had risen by 9.1%, which is considered the fastest rate since November 1981, but this bad news increased pressure on the Federal Reserve, which seeks to control inflation and keep it under control. place by trying to raise interest rates short The term and sale of financial securities amounting to $ 8.9 trillion in the general budget.

The author believes that all of these instruments are useless because they reduce the severity of inflation while increasing the slow pace of the economy, which increases the chances that the United States will suffer from recession.

Indeed, some of these fears are justified, and for these problems the current coronavirus, the Russian war in Ukraine and the rise in global energy prices are a recipe for an economic crisis, to say the least.

Millions of people will experience painful experiences if this slowdown reaches the worst that can be classified as a recession, but if one is lucky enough to have the financial resources to invest in stocks or bonds, the coming months may be difficult for him be, but he can overcome it with a little planning.

The author emphasizes that he is trying to help readers who seek advice, but he admits that no one knows where the markets or the economy will lead in the short term.

vague expectations

The future of the economy is not clear, the estimates currently being traded are based on guesswork, and long-term investors may be better off ignoring the news, as even careful studies on economic and financial data do not offer useful guidance.

stock market situation

The author points out that the future of the stock, bond and commodity markets is also vague and unclear, and although stocks and bonds have been damaged this year, the value of commodities such as oil, wheat and copper has risen, with a few exceptions, of course , and the value of shares has not fallen much recently, while bond prices have risen And the oil price has fallen from what was recently recorded.

The Fed’s plight

The Federal Reserve is in a difficult position, and the St. Louis Federal Reserve says that “the bank has been given a dual mandate to pursue the economic goals of maximizing job creation and price stability,” which are now disputed goals and price stability. has become the major problem facing the Bank, while the recent report on inflation makes an increase in interest rates inevitable.

The unemployment rate in the United States in June was 3.6%, which is not far from the lowest level recorded in decades, but with increasing economic growth more people are expected to join the labor force, but this is unlikely for the time being.

The Federal Reserve has begun tightening financial conditions to reduce the growing demand for goods and services that have helped boost inflation, and financial markets expect interest rates to continue to rise, reaching 3.57% during the first quarter of next year.

At this point, the Fed may need to start lowering rates, and one possibility is that inflation will then turn out to be moderate, allowing the Fed to refocus on securing as much work as possible.

However, it is also likely that the Fed will not be able to keep inflation in check without causing a recession, and it is also conceivable that inflation on its own will fall significantly as the supply chain problems caused by the Corona virus caused fading and the war calming down, to make additional increases in interest rates is unnecessary punishment for workers.Oil prices have fallen recently and gas prices have followed, although they are still high.

What is clear is that the Fed has no real choice, inflation is a hot political issue and the Fed should be seen as working to control it, though its moves undoubtedly increase the risk of a recession.

What do the markets say?

The author says that what economist Paul Samuelson wrote in Newsweek magazine in 1966 is still largely true: “Wall Street indicators have predicted 9 of the past five recessions,” as the S&P 500 predicted. ) with 7 recessions out of 16 cases, and the indicator predicts slow growth, but he does not expect a recession yet.

What can we do?

The author emphasizes the importance of ensuring that you are able to pay bills and have enough cash for emergencies, and insists that the funds be kept in a safe place, preferably in a place that has a small return. offer. Reasonable options include high-yield bank accounts, money market funds, treasury bills and bonds.

For investors it is a good idea to put money in low cost, diversified index funds that follow the entire stock market, as well as diversified bond index funds with age, and for people with shorter horizons the situation is more difficult because they may have to make some exchanges .

If the economy slips into a long and deep recession, the stock market may suffer a setback and not recover for some time, and preparation for this event may mean that the allocation of shares is reduced if funds are to be used soon, and although the bonds have not performed well recently, high quality bonds are more They are generally safer than equities, and therefore they are suitable for reducing risks, and accordingly the author encourages those who want to invest in a mixture of looking for diversified equity and bond funds that suit them.

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