How Do Global And Domestic Issues Affect The Market?

This year is turning out to be a historical one for many reasons. Who would have thought at the beginning of the year we would be worried about a Middle East conflict given what was happening in Ukraine? I pray for the people in that region, hoping that they can enjoy peace in the future. Other issues impacting the end of 2023 include a government shutdown, change in interest rates and next year’s presidential election. All these issues can affect the market.

Congress narrowly escaped a government shutdown by passing a temporary bill keeping agencies open until November 17. This is a temporary measure that was necessary to avoid larger problems that would have happened if they had shut down. The market may have responded negatively to a shutdown. It still may if they don’t get a long-term solution passed.

The Federal Reserve increased rates four times in 2023, holding steady this past September. The purpose of increasing rates for the past year and a half is to combat inflation, and by all measures, they have been successful in doing that. The Federal Reserve’s goal is to see inflation around 2% and it is currently around 3.7% (the inflation rate started 2023 at 7.5%). Most economists are predicting a rough landing in terms of interest rates stabilizing early next year and are hopeful that rates can start to decrease later next year. We are experiencing an inverted yield curve where short-term rates are higher than long-term rates and, historically, that is the beginning of a recession. Does that mean a recession is forthcoming? Not necessarily.

The Israeli conflict is problematic for several reasons, but, in particular, the number of conflicts compounding on each other can be a concern. We just sent another $6 billion in aid to Ukraine, and now we will need to come to the aid of Israel, and at what point does this put strain on our markets? What if other conflicts were to happen? War can be a good thing for markets in terms of the economic boom it creates, so increased military conflicts could expand market growth beyond the growth we were already seeing with artificial intelligence.

The elephant in the room is the upcoming presidential election. It appears we might have a repeat of the last election. Is the country ready for the divisiveness and battles that will take place on top of everything else that is happening? Can one of the other candidates gather enough momentum to take their party’s nomination? How will the market respond to whoever is running and whoever wins? These are questions that are yet to be answered.

Hopefully, 2024 will bring clarity to many of these questions, but in the meantime, it’s important to keep in mind that a diversified portfolio can withstand many of these potential problems. Allocating across several asset classes and areas protects you from overall market risk. Market risk can never be truly diversified away, so there will always be some level of market risk to work through. Determining the amount of risk you want is key. How you allocate the balance of your portfolio not in stocks and other equities becomes very important.

Luckily, we have seen interest rates rise, making fixed investments like bonds, annuities and certificates of deposit attractive. Many people are advised to have monthly income derived from fixed investments as much as possible. That way, your income is fixed and not determined by the market. When you combine these fixed payments with your Social Security payments and pensions, you are guaranteed a certain amount each month. With all the uncertainty in the world, knowing your monthly income is a powerful feeling.

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