The silver lining of today’s inflation

Chris Stennett, CFP®, Senior Financial Advisor, Financial Advisory Services, Saltmarsh Cleaveland & Gund

Five months into the new year, it’s clear that 2022 will be just as unpredictable as the last five years have been. At the present moment, the S&P 500 Index (Large U.S. Stocks) is down almost -14% on the year. The Bloomberg Barclays Aggregate Index (U.S. Bond Market) is down -10% on the year. Inflation has persisted and has forced the Federal Reserve to tighten the money supply. Though the challenges investors face this year are substantial, it’s important to keep in mind a few things.

Markets don’t always go up—and that’s ok

The fundamental goal of investing is to make money. We’ve talked in the past about how investing involves a trade-off between expected risk and returns with stocks, investors have the potential for unlimited returns, as there is no cap on the price of a stock. The “risk-tradeoff” is that stock prices don’t always go up, and the potential exists to lose 100% of the money invested. With bonds, investors typically see a more stable price and more predictable investment returns. The risk-tradeoff is that bonds might not keep up with inflation, eroding their future purchasing power. That’s one of the reasons why retirees typically hold stocks and bonds in their portfolio, rather than just bonds.

Non-retired investors benefit from markets going down as well. Every few weeks, millions of non-retired investors get paid, and a portion of that pay is diverted to their 401k/workplace retirement plan. Those dollars purchase stocks and/or bonds at those current prices, meaning when prices are down, more shares can be purchased.

You have a lot to lose—but it takes a lot to lose it

Another point to keep in mind is how well the stock market has done in recent years. The Nasdaq 100 (Large US Stocks excluding Financials) has returned more than 702% (cumulative) over the last 10 years. To put those gains into perspective, a 20% decline in the index would bring you back to 2021 levels. A 30% decline in the index would bring you back to 2020 levels. A 60% decline in the index would bring you back to 2019 levels, and a 70% decline in the index would bring you back to 2017 levels. Hopefully, that provides some comfort if stock prices continue to slide. As noted above, those large declines will likely still benefit millions of non-retired investors as they make regular 401k contributions.

 Most investors needed (some) inflation

Bonds are a big part of long-term investing and are held in most investors’ accounts in some form. Bonds tend to move in the opposite direction of stocks (but not always as we’ve seen this year) so they are often used to dampen risk. Bonds also offer income to investors through their interest payments. Because interest rates have been very low since the 2008 financial crisis, prevailing bond interest payments have also been low. To receive higher interest payments from bonds, general interest rates first needed to rise. But the Fed controls interest rates and until recently, there’s been no reason for the Fed to intervene.

Due to a variety of forces, inflation is higher than it’s been in recent years, forcing the Fed to act and begin to raise interest rates. While this initial rise in rates negatively impacts bond prices—hence why the bond market is currently down—those new rates set the bar for the prevailing bond market. New bonds being issued will be offering higher interest rates, which offer more income to investors as they make their way into investor portfolios. It may be hard to stomach right now, but many investors needed this inflation to give their portfolio an income boost.

Finally, there’s no substitute for a sound investment plan. When markets go down, investors tend to make emotional decisions, often to their detriment. Rather than letting market movements be the driving factor in your investment decisions, let your Investment Policy Statement guide your decision-making.

Hear more at TBA’s Trust & Wealth Management Conference

Chris Stennett will speak at TBA’s Trust & Wealth Management Conference, held Nov. 1 & 2 at the TBA Training Center in Nashville. Register now at

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