Monday, February 19, 2018

After The Storm

ASK THE CFP® PRACTITIONER


Storm surge on Marco Island. Photo by Steve Stefanides

Storm surge on Marco Island. Photo by Steve Stefanides

“There are some things you learn best in calm, and some in storm.” ~ Willa Cather, American Writer (1873-1947) Question: It surprises me that financial markets are doing so well after Hurricanes Harvey and Irma along with the North Korean situation. Can you explain why this might be? Answer: It’s counterintuitive to see markets making new highs in spite of these circumstances. Locally we are focused on the damage, destruction and recovery from Hurricane Irma, as are those in Houston following Harvey’s impact. Living in the midst of such disruptive events changes perceptions. Eventually, lives, homes and businesses will be rebuilt and we’ll find a “new normal.” Regarding North Korea and “Rocket Man,” there’s no favorable outcome from military confrontation by the North Koreans, Chinese or United States, so the best hope is that this is political posturing rather than nuclear war.

 

 

The solid market returns year-to-date have been based on real corporate earnings, growth, technological expansion and confidence. A relatively positive economic environment with low inflation, steady employment gains, slowly rising incomes and lower interest rates contribute to genuine global growth. The majority of what we hear, read and see is focused on short-term noise and news.

Investing is a long-term proposition as opposed to trading which focuses on shortterm moves. Investments made in reaction to short-term events often lead to inappropriate decision-making and undesirable results. Slow sustainable growth isn’t necessarily a bad thing for the stock market.

In the weeks ahead expect a bounce back from Harvey and Irma’s effects. Energy exploration should pick up and retail sales will rebound as Houston and Florida get back to normal. It’s true, Irma had widespread impact on Florida’s economy, disrupting activity for the better part of two weeks. Don’t expect rebuilding to have a big impact on growth because it’s never enough to offset the loss of activity, productivity and physical damage. Each new home or car is offsetting something that was a total loss. The net effect is a zero-sum game.

Meanwhile, the Federal Reserve is expected to begin downsizing it’s balance sheet in October. The storm surge in Federal debt following the Great Recession expanded from approximately $1 Trillion in 2006 to over $4 Trillion in July 2017. It’s expected that the balance sheet surge runoff will likely begin in October.

Just as the impact of Irma and Harvey will be ongoing, we’re globally still in the recovery and repair phases of the 2007- 2009 Great Recession. Expect the Fed to lead the way, Europe will likely follow, with Japan allowing those Central Banks to do their work for them. The global economy has never executed a maneuver like this before so it’s likely that there may be disruptions. Federal Reserve Chairwoman Yellen’s future is likely to be scrutinized along with any upcoming interest rate hikes, inflation levels, and tax policies as debt levels presumably dissipate.

Being prepared to weather any storm, whether it’s financial, physical or emotional is the key to success.

We see events occur on the world stage that disrupt our lives that we could never imagine, just as we face adversity in our own lives on a more personal level. Financial planning helps to identify where you may be vulnerable and offers solutions. We’d rather prepare ahead of the next challenge. It’s likely that you conduct preventative maintenance on your home and cars and schedule annual physical exams.

Regular insurance and financial reviews are also a priority. An emergency fund may be helpful to provide for unexpected expenses. If you have damage from Irma, establish a strategy to coordinate expenses and if appropriate, incorporate potential losses from hurricane damage into your comprehensive plan.

There is a delicate balance between risk and reward. Those of us who call Marco Island and Southwest Florida “home” know the risk associated with the potential threat of a hurricane and chose to live here regardless. We can transfer some of that risk with insurance. Having a written hurricane plan in place to protect life and property is a means of tactically reducing the threat. Joining hands and working with others is another approach to mitigating and recover from perils. For instance, sea otters hold hands while they’re sleeping so they don’t drift apart; it’s that important for them to stay together. The

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