Market Cycles

Market Cycles

June 03, 2024

You may have heard "Don't Fight The Fed" or "Now is the time to buy ___" or "You used to be able to purchase ___ on a middle class income." These are all statements comparing current reality to different times. Right now, cash earns an interest rate higher than inflation. That hasn't happened in 20 years. We went through a 20-year phase where we were disincentivized to save and hold cash. We went through a short period where home loan interest rates were lower than inflation. We are now in a period where a first-time home buyer will buy their home for more than their neighbors did and at a higher interest rate with a larger mortgage payment. This hasn't happened for any extended time for over 40 years. 

What does this mean for you? It means the right decision today may be different than the right decision of the past decade or two. It's important to use an intelligence filter when making financial decisions. Just because buying CD ladders was a good decision in the 70s and 80s, that doesn't make it the right decision for the past 40 years. In fact, that is a great example of an easy answer being the wrong answer for those retiring in the 90s through today. Will CD ladders become a good option for some retirees in the future? Maybe. Maybe not. It all depends on current reality. Right now, CD ladders don't make sense because the highest interest rates are on very short-term CDs. 

What should we be thinking about now that hasn't been a good decision in the past? The first thing to come to mind would be saving cash in an interest-bearing account. Today, that cash should earn 4-5%. That is great and fundamentally different than anything that was possible in the past 20 years.

Along with higher interest rates, we see inflation that will probably stick around for a few more years. That means costs will continue to rise. This will likely occur on services more than products. If you are in a service business, you may see good years in the immediate future. There will likely be a higher demand for quality services and service providers across most industries. 

Another consequence of higher interest rates is added pressure to reduce debt. It's possible that we will see fewer Americans in high-debt situations over the next 5-10 years. Debt is costly, and higher interest rates are a good incentive to pay down debts and avoid them all together. This may not happen as much as I would like since most people go into debt because of bad choices or a level of greed that will not be affected much by debt costs rising. 

If you would like to learn more about Market Cycles, read this article.