S3-2: Bear Market, the British Pound & A Deep Dive on Estate and Will Planning

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It feels like I start every week off this way lately, but last week was a newsworthy one for financial markets in many ways. All major US stock indices – the Dow, S&P 500, and the Nasdaq – are all firmly in bear market territory. Market volatility continues to remain high, and last week was exacerbated by a plunge in the British Pound, reflecting investors’ concerns around the new Prime Minister’s fiscal policy plans. And the PCE Price Index for August, the Fed’s preferred measure of inflation released last Friday, showed little sign of inflation alleviating. I will dive into details on all of the above, before sharing this week’s deep dive with Crista Hermance of Hermance Law and Estate Planning Mom to talk about a will vs. estate planning, or how to protect your assets and minor children when you are no longer here. Read on for more or listen to it all on this week’s episode of Finance Explained.


What Does the Bear Market Mean for YOUR Portfolio?

Last week, all 3 major US stock market indices – the Dow, the S&P 500, and the NASDAQ – ended the week firmly in bear market territory. A bear market is any time the market is down at least 20% from its prior peak. The Dow ended the week down -21.0%, the S&P 500 finished the week down nearly 25%, and the NASDAQ is now down over 30% for 2022 year-to-date.

What’s putting such downward pressure on the market? Recall the major drivers of stock market performance include interest rates and company earnings. The stock market is inversely correlated with interest rates, so as interest rates go up, as is happening now, the stock market goes down. Higher interest rates mean lower valuation multiples for companies, bonds start to look more attractive, and it means higher borrowing costs for businesses too.

Additionally, higher borrowing costs and ongoing inflationary pressures means lower growth, if not declines, in corporate earnings. That pressure is heightened further by looming concerns of a potential recession. Higher interest rates and pressure on corporate earnings is a double, negative whammy to share prices, leading to the current double-digit stock market decline.

What does this mean for your investment portfolio? Remember that long-term stock market returns include these ups and downs along the way. The long-run return potential, what you expect to earn over the next 10-20 years, is unchanged, and in fact, historically speaking, investing in periods of significant drawdown, is shown to generate above-average returns.

Investing on any given day since 1927, a year later, on average, you would generate a 9% annual return. Investing on days when the market was down 20% or more? A year later, on average, you would have generated a 12.5% return. Now, does this guarantee that a year from now the market will be up double-digits? No… but the law of averages and history puts the odds heavily in your favor. On days with a 20%+ drawdown, a year later the market has been up over 77% of the time. (On any given day since 1927, the market was up nearly 70% of the time a year later).​​​​​​​​ All of the above data points are also the rationale for not trying to time the market because most of the time, a year from now, the market is up, and up significantly more than inflation or other potential investments, like bonds.​

Remember, there is no such thing as risk-free returns. Investment returns only come from taking some risk. But being informed and a student of market history can help you get comfortable with risks and be more confident in your decisions to take them.​​​​​​​​

What’s Happening with the British Pound

The other major financial headline maker last week was the tumble of the British Pound. Currencies are valued relative to one another, and the British Pound relative to the US Dollar, reached a multi-decade intraday low last week, before ending the week at 1.12 British Pounds per dollar.

What drove the sell-off? The new UK Prime Minister, Liz Truss, who only took office at the start of September, made a bold announcement last week. She announced the biggest tax cuts in the UK since the 1970s. Tax cuts normally generate a favorable response in the markets, but today isn’t a normal economy. The UK, like most economies, is fighting inflation, with the Bank of England, their central bank, hiking interest rates, just like the Fed to combat it. The UK government is also faced with heightened government spending due to rising energy costs.

The mixed messages from the UK Central Bank and Parliament were swiftly rebuked by global investors, as evidenced by the rapid decline in the British Pound. Investors want certainty and predictability. Having policies that send mixed messages like this drove investors to sell Pounds, and invest in countries with clearer messaging – like the US dollar, where the Fed continues to all be on the same page, hiking rates to combat inflation.

In response to the swift fall in the currency, the Bank of England seemed to muddy the waters even further, announcing plans to “purchase up to 5 billion pounds of bonds a day with maturities of 20 years or more until Oct. 14” in order to stabilize the market. However, remember the central bank buying bonds adds to inflationary pressures… while at the same time they are raising interest rates to try to combat inflation.

The end result of the week was a weaker British Pound, and PM Truss dropped plans for tax cuts, leaving her in a weak position politically both within her own party and with her opposition.

What does this mean for you? One, if you want to go to the UK right now, the exchange rate doesn’t get much more favorable. Two, hopefully, our own US leaders – both at the Fed and in the White House and Congress are taking note of how NOT to wade through this period of economic uncertainty. While tax cuts and increased government spending can help stimulate demand and ward off a recession, they are dangerous maneuvers when also combatting inflation.

What’s the Latest On Inflation

Last week, we also got another data point on inflation. On Friday, the Bureau of Economic Analysis released Personal Income and Outlays for August, which also includes the PCE Price Index, the Fed’s preferred measure of inflation.

Two big takeaways from the release. First, current levels of consumer spending are not sustainable with incomes. While incomes and spending are up on a headline basis, adjusted for inflation, incomes are down -4.5% year over year. Real consumption expenditures are up +1.8%, made possible only by near historic low savings rates – now at just 3.5%. The growth trendline for consumer spending is downward sloping, and as consumer spending goes, so goes the economy.

The second major takeaway is the PCE Price Index, indicating +6.2% inflation from a year ago, with the Core PCE Price Index, excluding the impacts of food and energy prices, up +4.9%. Inflation is clearly still elevated, but of even greater concern, the core measure increased in August, up +0.2% vs. July, as service prices accelerated. Food price inflation also continues to rise, a direct hit with massive impact on consumer budgets.

Remember the Fed is currently raising interest rates to combat lower inflation. The Fed has a two-pronged mission: 1) to promote a stable price environment which they define as 2% long-run average inflation and 2) to promote full employment which historically they have defined as unemployment rates around 4-4.5%. The Fed will therefore continue to raise interest rates until one of two things happens: 1) inflation comes down to their long-run average or 2) unemployment climbs above their tolerable threshold. Their mission doesn’t preclude them from inducing a recession, and in fact, a recession, or decline in consumer demand and production, may be needed to truly reign in inflation.

I will continue to monitor employment metrics and inflation data in the coming months, as well as the Fed statements, and report on what all of these indicate for interest rates and the markets going forward.

Personal Income and Outlays
The Personal Income and Outlays report for September 2022, including the PCE Price Index, will be released on October 28, 2022.

A Deep Dive on Estate and Will Planning

One area of personal finance that I am not an expert in but should be a critical component of every family’s financial plan is wills, trusts and estate plans. This week’s deep dive features a conversation with Crista Hermance of Hermance Law, also known as Estate Planning Mom, who IS an expert as an estate planning attorney. She’s also building out a network of estate planning attorneys across the country to help families connect with estate planning attorneys in their states because probate law – the laws governing wills, trusts and estates – are state specific. We cover the different documents involved, the people you need to consider for various legal roles in your plan, the costs, and more!

To learn more about estate and will planning, be sure to listen to this week’s episode of Finance Explained and check out this prior Q&A with Crista below.

Related Post: How to Protect Your Kids – 10 Things to Know About Wills vs. Estate Plans


Coming up next week on Finance Explained… I’ll cover the latest on the labor market featuring the August Job Openings and Labor Turnover report AND the first Friday of the month’s Employment Situation Report. I’ll also be announcing our Q4 FFM Book Club pick along with a deep dive with its author and current economics professor about the importance of widespread financial and economic literacy.

Spread Financial Literacy… PIN THIS!

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About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

2 Comments

  1. Jacki on October 6, 2022 at 9:25 am

    I appreciate the estate planning info. I actually just finished the process of updating my will )my kids are now in their late 20s), updated my PoA, Healthcare directives and established revocable trust. It was very comforting to hear my experience be do hand-in-hand with Christa explanation of what to expect, cost, etc. – The necessity of this recently hit home when the 60 year old mother of my daughter’s boyfriend, passed suddenly. She and her husband had no will, or health plan, and she had handled most of the financial jobs in the relationship and was responsible for supervising her stepmother who lived nearby. The husband is feeling very overwhelmed by all that is needed to be done.
    Thank you again for providing relevant information on important topics.

    • Meghan on October 6, 2022 at 1:54 pm

      Thank you for sharing! Sadly, that is so often the story for so many – and we don’t think about or want to think about things like this until it is too late.

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