RICHMOND, Va. -- With millions of Americans getting vaccinated and a $1.9 trillion stimulus package signed into law, hopes are rising that the end of the pandemic is finally in sight -- and with it, the comeback of the U.S. economy.
Sandy Wiggins, with ACG Wealth Management in Midlothian, said despite the global pandemic, the stock market had a very good year last year, fueled by the Federal Reserve’s determination to keep interest rates very low.
But he cautioned, the individual investor who may be saving for retirement, should never change his or her strategy: a diverse portfolio – big companies, small companies, stocks and bonds- remains the key element in your planning.
“The Federal Reserve lowered interest rates almost near zero, in order to help create some stability as the pandemic began to unfold,” said Wiggins. “Having low interest rates is good for the economy and stimulates purchases, and consumers, obviously, like cheap money.”
Wiggins said on Tuesday the Federal Reserve indicated rates could stay this low through 2023, which stock market investors love, but it also creates the perfect conditions for inflation. As the economy heats up, so do prices and eventually, wages.
“There's a lot of talk about inflation right now and about the 10-year treasury bond as an indicator of where inflation is going,” said Wiggins. “If you think about inflation, it’s when too few goods and services are available to the demand, so as demand goes up, the price of things goes up, because more and more people are chasing it. And if it gets too high, for example, if the price of airline tickets gets too high, people aren't going to fly.”
He said that’s the delicate balance the Federal Reserve must maintain: keeping the economy humming along, without allowing prices to start rising too quickly.
And Wiggins said watching the trajectory of the 10-year treasury bond provides a strong hint of where inflation might be headed.
“If you want to look at one thing to try to get a feel for where inflation might be headed, look at the 10 year treasury rate, starting at the beginning of February,” Wiggins said. “And it's a fairly steep and rapid increase in rates, and so as rates go up again, that could be an indicator of inflation getting hotter and too hot inflation can actually hurt the market.”
Wiggins pointed out that big tech companies – Amazon, Google, Facebook- did quite well last year when everyone was stuck at home in front of their computers.
He said you might feel some regret about missing out of those companies' gains. But he said, now that the economy is “cycling” back into gear, and the tech-heavy NASDAQ coming back down, for example, a diversified strategy means you’ll get decent gains over time by not having over-committed to one sector.
“We have a large companies like Facebook and Amazon, Netflix, Google, Microsoft, large tech companies and the NASDAQ is an index of those types of companies,” Wiggins said. “And so, we've seen a rotation in the market as interest rates have increased, people are selling out of tech stocks and moving into other parts of the market. So again, it goes back to diversification. You don't want to have all your eggs in a large company basket, you want to have them spread out in other places, so that when this type of environment occurs, you're not left holding just large company stocks.”
As always, talk to an advisor before you invest.