Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, May 19, 2022

The Economy and the Stock Market: How are They Related?

 The following blog post was written by our interns, Brady Gray and Mauria Ferrell.

What is the economy and what is the stock market and what do they have to do with each other?


The economy is all of the goods and services in the US. We measure the economy in terms of Gross Domestic Product (GDP) which is the dollar value of all of those goods and services. 


The stock market is where the buying and selling of shares of publicly held companies takes place. A stock is a share in ownership of a company. Companies allow people to purchase stock so that they can get the capital they need to invest in new projects or machinery. Just over half of the U.S. population owns some stock. The stock market is forward looking: The price moves reflect how investors feel about the future of these companies based on economic expectations.


So, how do we measure the economy and the stock market’s performance? It is important to remember that they do influence each other, but they are not the same thing.


When looking at the economy we generally consider 3 key indicators. These indicators are the unemployment rate, consumer price index, and gross domestic product (GDP). If GDP is rising, that means the economy is growing. A falling GDP indicates that companies are producing fewer goods and people may lose their jobs. A recession is generally defined as a decline in GDP over two quarters – a shrinking economy. 


As far as stock market performance, there are many indexes that follow the overall direction of the market. For instance, the S&P 500 tracks the performance of the top 500 largest publicly traded companies. While there are thousands and thousands of stocks out there, the stocks in this index represent a very large portion of the market’s overall value.

How are the stock market and the economy related? When GDP is growing, individual businesses areproducing more and expanding. A rising stock market is usually aligned with a growing economy and leads to greater investor confidence, which leads to more buying activity. When consumers buy more, businesses produce and sell more goods and services. All of this results in a higher GDP.


While the economy and the stock market are different, they influence each other in various ways. The stock market alone is not an indicator of economic health, but good economic health can positively influence the stock market. We use key indicators like GDP, consumer price index, and unemployment rate to tell us the true health of our economy. So, next time you go to invest in the market, keep in mind how the market and the overall economy are working together.

The graph below shows the total value of the stock market as a percentage of GDP (FRED).

What is money?

The following blog post was written by our interns, Brady Gray and Mauria Ferrell, in response to a question we received on the radio this week. You can listen to the full show here

Money, by definition, is anything that is accepted as a form of payment in exchange for goods and services in a particular region. The official currency in the United States is the U.S. Dollar (USD) and its value is guaranteed by our federal government. Cryptocurrencies, however, are not backed by any nation’s government. This can make Cryptocurrency more volatile and riskier in general. It is important to understand that the Federal Reserve is the central bank in the U.S., and it controls how money moves, known as monetary policy. 

The U.S. Dollar and the amount of money in circulation is controlled by the Federal Reserve. This along with adjusting interest rates is referred to as monetary policy. The Federal Reserve actively analyzes the state of the economy and creates or destroys money as needed. Now, when they say “destroy”, it does not mean literally shredding up paper bills. They can take money out of circulation by changing short-term interest rates and by adjusting bank’s reserve requirements. Both of those actions will decrease or “destroy” money. On the other hand, if they wanted to “create” money, or increase the supply, they would just do the opposite. For instance, we saw towards the beginning of the pandemic, record low interest rates and stimulus payments from the federal government. Note that stimulus payments were not part of monetary policy, but rather a form of fiscal policy controlled strictly by the federal government. Very low interest rates encouraged spending in the economy. Many Americans bought new homes, cars, and other things while the cost of financing was at record low levels. Today we are seeing effects of those past events. The economy started to grow at never-before-seen levels and the policies did not change in time. Inflation is currently at 8.3% as of April 2022. Inflation is the term used when the purchasing value of money decreases. 


Another form of currency that has recently surfaced over the past decade is cryptocurrency. It is not specific to one country or region, nor is it backed by one. Instead, crypto uses a technology called blockchain. Blockchain is a specialized system that records all transactions made with cryptocurrencies. It utilizes several computer systems across the world to keep accurate records. As I mentioned before, cryptocurrency is generally riskier due to the fact that there are many unknowns. How do we know for certain that a coin holds the value that it claims it does? It is a great question; any many people wonder the same about the U.S. Dollar. They think that a U.S. Dollar may not have value because it is no longer backed by the gold standard of the 1960s. The difference here is that the U.S. Dollar is backed by our federal government. A one-dollar bill is recognized by everyone across the world as a ligament currency that holds its value of one dollar. With cryptocurrency, you have to believe that a specific coin is worth the amount shown. No one can prove or assure you the value of that coin. 

Can we consider cryptocurrency money? Let's look at what happened with Terra. Terra is a "stablecoin," which is a cryptocurrency that is intended to have a fixed value, typically $1. Given their intended stability, they are meant to provide more reliable store of value and medium of exchange. Terra's recent downfall however lets us know that cryptocurrencies are not quite ready to be considered money. 

Wednesday, May 11, 2022

Priceless Knowledge

My dad will be 93 in August. Finally, he agreed to use his cane regularly since his balance and agility have suffered. Other than that, he manages fairly well. He still drives. He cooks. He handles his own finances… with a very tight fist!


Last year, my mother passed away. During her decline, I began questioning my father about their finances. I asked him for a list of assets and income. He said he’d give those to me, but he never got around to it. I needed those numbers to have discussions about their care and living arrangements, and I AM a financial advisor. It’s what I do, but I was having trouble helping my own family.


Every family is different, but most have a difficult time leaping from the all-knowing, all-providing parent to the new relationship that requires dependence on a grown child. Money is an intimate subject, and some families just aren’t good at broaching that subject. Some parents may be embarrassed by their lack of resources. Some may just be concerned about giving up control.


But broach it we must. Generally, I encourage clients with grown children to begin eking out details about their financial lives. The older the parent, the more important it becomes to share information. And maybe not all offspring need to know everything, but the full picture should be known by at least one person.


If you are the grown child of an aging parent, how do you encourage your parents to share financial information? Schedule a quiet time to talk. Don’t ambush them at Thanksgiving. Make it a time outside of the big family gathering. Tell them you want to learn about their situation and offer any help they may need. Give them time to gather details about all accounts. 


Whatever they put in front of you, keep your surprise to yourself. For many grown children, it’s a shock to see their blue-collar parents’ sizable portfolios. Yes, you may express admiration for their fiscal management. And you should probably make sure they understand the purpose of those funds is to care for themselves, not to leave money to family. But, of course, they will still want to do that.


And if the list is meager, be calm and straightforward. Their funds may limit their choices in old age, and everyone should be realistic. Get educated about assistance options—Medicaid, Veteran’s Benefits, etc. The better you are at researching options and processing forms, the better off they’ll be. Don’t assume assistance will happen automatically. Somebody has to make it happen, and it will probably be you.


My dad finally gave up the list. Opening the door allowed us to have honest discussions about what would be best for him. I think it was a relief for him to finally share that information. I know it was a relief for me as we began planning for the “what’s next” part of his life. He went through the legal paperwork to name me as power of attorney. He began consolidating and simplifying his accounts.


This week, we moved him into assisted living. After my mother’s death, he recognized the risks of living alone. A minor fall shocked him into action. He also recognized the need for more social interaction. Because I knew his financial situation, I could help with this transition knowing it was sustainable. He’s still paying his own bills and handling all his own financial decisions, but I know he’ll be okay. That knowledge is priceless.



Friday, April 29, 2022

Talking to Kids About Money

At New Perspectives, we're passionate about financial education. We love to be a part of helping individuals and families to navigate the complexities of markets, the economy, and understanding the role that individual choice can play in helping to shape one's financial future. 

When it comes to talking to kids about money, when is the right age to start? Children as young as age 3 have the ability to understand some basic money concepts - as long as they are presented at the appropriate level. 

Check out the graphic below for some guidelines regarding which money ideas to teach children at different ages. If you would like additional resources, give us a call! Who knows - maybe you could be the one to put your child, grandchild, or other loved one on the road to financial security and success!

Friday, February 25, 2022

CFA 18th Annual Forecast Dinner (worth the wait!)

 The CFA society of Mississippi hosted its 18th Annual Forecast Dinner at the Country Club of Jackson on February 24, 2022. After postponing the event last year due to Covid restrictions, we were anxious to hear what our experts had to say! As usual, the event did not disappoint. Financial advisors, clients, faculty, and students had the opportunity to reconnect with old friends and meet new ones over a delicious meal served with festive libations. The highlight of the evening was a truly compelling discussion about what our panelists predict for the behavior of the financial markets in the upcoming months. 

Going into the event, there were a number of things on our minds. We were awakened that morning to news of Russia invading Ukraine. With inflation fears looming and the after-effects of Covid still taking center state, we were hoping for some reassuring words from our panelists.

Speakers were Michael Scanlon, Managing Director and Portfolio Manager at Manulife Investment Management; Mebane Faber, Co-Founder and CIO of Cambria Investment Management; and Kenneth Woods, Chairman of Asset Preservation Advisors. Dr. Eduardo Marcelo, Professor of Finance and Dean of the School of Business at Mississippi College, moderated the event. 

Michael Scanlon's overall message: expect more muted absolute returns and a lot more volatility. Michael manages a balanced 60:40 stock/bond portfolio and believes that this balanced approach is still appropriate for the majority of investors. He also believes that US companies are still attractive, giving particular mention to the healthcare and tech sectors. 

Mebane Faber seems to favor holding a market-weighted portfolio that tracks the entire world in proportion to the underlying assets' market capitalizations. As the US is currently about 60% of market cap, he suggests that many investors increase their foreign holdings. Relative to foreign markets, the US has done well lately. Over the long term, however, the odds that the US will outperform the rest of the world are about 50:50. 

Because Kenneth Woods is a fixed-income specialist, his focus was more on bonds. He noted that investors should be in shorter term bonds right now as we are anticipating the Fed to raise rates throughout this year. He spoke of the possibility for an inverted yield curve - an indicator that recession could be looming - but also pointed out that the demand for long term US bonds is still healthy.

All three panelists named inflation as a large concern going forward, though the "significant inflation" that's "here to stay" is referring to inflation in the range of 3-4% - a much more palatable rate than what we've seen in the last few months. The panelists also touched on current geopolitical events, noting that international shocks (like the Russian invasion of Ukraine) will inevitably shake the markets in the shorter term. Over the longer term, however, market prices will reflect the health of the companies and the economies that they represent.

The most interesting takeaway for me was how different each of the panelists' predictions were for the behavior of the markets going forward. When asked where the S&P 500 will be one year from now, their answers ranged 36%! Nancy reminded us that it is precisely when prognosticators all fall in line with their predictions that markets are at greatest risk. Opinions that range broadly, rather, are indicative of a healthy market environment - and diverge they did!

I thought that the panelists were well-chosen and was delighted that the conversation remained accessible throughout. I strongly encourage each of you to listen to the program - we'd love to hear your thoughts!