What Are The Economic Factors That Impact Your Investment Portfolio

Love to get your thoughts on is how the economy affects my portfolio. So let me share a story with you quickly. First time that I ever came onto the air with Dan.

So the first time that he ever let me talk on the air so that people on the radio could hear was he would have me give an update on which economic indicators would be reported for that week or for that day. And I’ll be honest with you, Shana, back then, I had very little idea of what I was actually talking about. Very little, like little idea of what I was telling him.

I would say which indicator it was. I would say the previous week’s reading, give him the number. And I understood almost nothing about why it was important.

And my guess is there are a lot of listeners out there who have similar understanding when we talk about things like GDP and we talk about PCE, home builder confidence, factory orders,consumer confidence, we mentioned again some of these yesterday and some today as well. It might sound like gibberish to some people. So, Shana, I’d love to talk about this today, especially considering that today, as you mentioned, we have an important one coming up.

What impact do these economic numbers in the economy as a whole have on my portfolio? And maybe just kind of to start, what are some numbers that we should think of as some that are most important that might be a good idea to keep an eye on? Well, I think the driving factor as of late has been inflation. For so many years, we experienced almost zero, or not zero, but very little inflation under 2%. Then we had Covid and we had the government spending a ton of money, injecting a ton of money into the economy.

We had supply chain issues. We experienced really high inflation. It peaked out at 9% in the summer of 22.

So that is the driving factor that we’re dealing with right now. And the Fed really has a couple of tools that they use to try. They have a dual mandate.

Number one is price stability. So they’re charged with keeping inflation in check by manipulating interest rates and money supply. And the second is full employment.

So they need to execute this price stability without harming the labor markets and without causing unemployment to go too high. That’s kind of their dual mandate. So, you know, that’s, that’s what we look at.

Inflation is a big one, is an important one because it impacts consumers directly. We have a consumer driven economy. About 70% of our economy is driven by you and I having jobs, spending money, and continuing to operate, you know, healthy budgets and, and being able to spend money.

So you, you know, consumers, when consumers don’t spend. Companies make less money. When they make less money, they tend to cut jobs, their profits tend to drop, and that causes their share price to drop, and that causes the market to drop.

So, you know, inflation really, since January of 2021 through March of 2024, overall inflation has increased, right, at 19%. That means. Yeah, that it cost us 19% more just to do the things that we do on a daily basis than it did in 2021.

During that same time period, the price of food jumped 21%, shelter increased almost the same 21%, and energy cost rose 37%. Grief. So, you know, it tells us, there was a report out recently suggested the problem is going to worsen if wage growth lags behind.

So, you know, I guess prices can go up as long as consumers paychecks are going up and that they can keep up. If not, they end up eating into their savings. Once that’s depleted, then they start to run up credit cards and act like the government, spending money that they don’t have.

So that’s one of them. Inflation data, labor data is the other one. And that influences what the Fed does with interest rates.

So if we continue to have these strong labor reports, which we have seen them weakening lately, then that makes it harder for the Fed to justify cutting rates. And then another one is going to be growth of the economy. So that’s measured in GDP.

We want to see the economy growing because that means that people are working. It means that, you know, that tax revenue is going to increase. Now, unfortunately, the government just, if they see an increase in tax revenue, they spend it before they even get it.

But, you know, those, those are just a few of the factors. It’s helpful there, Shana. And this is maybe a good question for someone like us, asking someone like you, who’s been doing this a longtime, how often should we check the news cycle for these economic indicators? Should we check it even at all? Or is it better to just let you tell us, you know, on the, on, on the air, you know,bringing certain numbers up and stuff? Is that something that’s good for us to check? I mean, if you understand what you’re, you know, what you’re looking at, you know, you can, you can read,you can find opinions out there all across the spectrum.

So anytime a number comes out, you can hear people saying it’s good, you can hear people saying it’s bad. So what I really suggest, unless you have a real interest in economics and a good background to look at it, is that whenever we report numbers, we try to give you some explanation about what that means, and we really do that for you. We look at the macro data that comes out.

We follow the companies that we invest in and that we encourage our partners to invest in, and that’s really reflected in the asset allocation models and what ends up on the buy list.