There’s More to it Than Meets the Bumper Sticker, or Post-Election Letter #2
By: Larry Eppolito, MBA, CFP®
Greetings!
As I wrote in my Preamble Letter. Now that the election is over, it’s time to write. As I’ve written many times, I recognize how sensitive people can be about their political beliefs. While economics and finance are often politicized, I write in economic and financial terms – not political terms. Also, since everything is open to interpretation, please remember, my words mean exactly what I want them to mean, no more no less (Lewis Carroll). So, please feel free to call me for clarification.
The following represents my economic and financial beliefs.
Much of what we read about the economy is open to interpretation. In addition to reducing complicated issues to easy-to-understand sound bites, the media often attributes economic outcomes to specific causes, as if factually true. I've said before, “Economic cause and effect is a pig in a poke” – it's difficult to trace today’s economy to any single person or policy, despite what the media or politicians may claim.
Complicating matters is that some economic policies that are beneficial in the short-term can have negative consequences in the long term. For instance, policies like stimulus spending can quickly increase consumer demand for goods and services and strengthen the economy but may lead to higher debt and inflation later on. Similarly, should the Fed reduce interest rates it might encourage borrowing and consumer spending in the short run, but if rates are held too low for too long it can also result in asset bubbles (usually due to speculation incentivized by cheap money) and unsustainable debt that could destabilize the economy over time. These trade-offs underscore the difficulty of balancing short-term gains with long-term economic health.
Furthermore, I believe most politicians are often not concerned with the long term! Worse, given that economics is such a complex subject, voters are expected to “be economists” and choose candidates based on their expectations of what those candidates can “do” for the economy – or for them personally via their economic policies.
The Massive Battleship
The U.S. economy is essentially the sum of all companies selling goods and services. It is far larger than any one elected official. In 2023, the economy produced ~$27T in goods and services (based on “Gross Domestic Product – GDP). Yes, that’s trillion with a capital “T.” The U.S. economy is like a massive battleship, and the various “economic winds” struggle to significantly alter its course. Economic growth or recession often occurs regardless of who occupies the Oval Office. (1)
How hard is it to turn the battleship?
In:
- 2019 – The year before Covid – economic output, or GDP, was $21.3T
- 2020 – The year of Covid – GDP was $0T.
- 2021 – America is vaccinated by June, GDP was ~$23.3T.
- 2022 – Post Covid Recovery, GDP was ~$25.4T. (1)
Of course, the Federal Reserve Bank (The Fed) “printed” about $3T for economic “stimulus” – in 2020 alone– to offset the effects of Covid on the economy. But that’s beyond the scope of this letter. (2)
The Bumper Sticker Solution
As the Roman Emperor Marcus Aurelius observed, “We are too much accustomed to attribute to a single cause, that which is the product of several.” But it suits the media and the politicians to reduce complicated issues to easy-to-understand sound bites that can fit on a bumper sticker.
Market Forces Are Powerful
While the President plays a significant role in shaping policy and setting priorities, the broader economic landscape is driven by a number of interconnected forces. Among these, market forces – such as consumer demand, business investment and innovation, credit availability, and global economic trends – are the most powerful.
Government Policies
Government policies are also a key to shaping the overall economy but are often quite diluted by market forces.
On Tailwinds and Headwinds
So, Who, or What Truly “Controls” the Economy?
In my next letter I’ll use the metaphor of headwinds and tailwinds to explain how various economic policies tend to affect the economy. Think of an airplane coming from California to Boston – benefitting from a tailwind versus the Boston to California trip that is usually an hour longer due to headwinds.
Also, I’ll write in very general terms about potential government policies (at the risk of losing all my clients) in my next letter. No guts, no glory, eh?
Best wishes,
Larry
November 21, 2024
Larry Eppolito, MBA
President, Eppolito Financial Strategies
Senior Financial Advisor, RJFS
CERTIFIED FINANCIAL PLANNER™ Professional
One Meeting House Road #13
Chelmsford, MA 01824
978-455-7799
larry.eppolito@raymondjames.com
https://www.raymondjames.com/eppolitofinancial/
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Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Eppolito Financial Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.
Raymond James Financial Services does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the Internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all e-mail.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Important Disclosures
Any opinions are those of Larry Eppolito and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change. This information is not intended as a solicitation or recommendation of any kind. Investments mentioned may not be suitable for all investors. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Diversification and asset allocation do not ensure a profit or protect against a loss.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations and the potential loss of principal.
Investing in fixed income securities (bonds) involves certain risks such as market risk, if sold prior to maturity, and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. In other words, if interest rates rise, after your purchase, you may receive less than your purchase price should you liquidate early. Bonds provide a fixed rate of return if held to maturity.
Sources:
(1) The St. Louis Federal Reserve Bank (FRED*).
(2) NASDAQ.com, Money Printing and Inflation, Ron Surz, 11/16/2021.
*St. Louis Federal Reserve Bank's online database of economic data is called FRED, which stands for Federal Reserve Economic Data.
Other Sources:
- Raymond James Washington Policy Weekly Wrap, Ed Mills, Alex Anderson
- Raymond James Weekly Investment Strategy
- Raymond James Weekly Institutional Equity Strategy
- Raymond James Weekly Economic Release
- Raymond James Daily Morning Brew
- The Wall Street Journal
- CNBC Professional
- Bloomberg News
- Financial Advisor Magazine
- New York Times
- The Boston Globe
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