Editor’s note: Kimberly Foss is a longtime columnist for Rethinking65. Read more of her articles here.
Kimberly Foss
Those of us who have been advisors for a while have grown accustomed to those times when the market seems determined to either ignore good news or disregard bad or concerning news. While most of our clients probably wouldn’t be alarmed by the latter condition, the former one can generate conversations with their advisors.
Unemployment is a great example. Sometimes gains in employment, though considered a good thing by most (especially those who need jobs), can signal higher inflation, which the market typically doesn’t like. That happened in late 2022 — a period when the Fed seemed particularly attentive to signals that the economy might be running too hot. But in mid-summer 2024, a weak employment report sent equities tumbling because traders interpreted a lower-than-expected jobs number and higher unemployment as recessionary.
Interest rate cuts are another example. Presently, any indication that the Fed may be ready to allow interest rates to fall can send equity prices higher. But during the Great Recession of 2007–09, equities remained in the doldrums for months at a time, even as the Fed cut interest rates like mad.
We Must Be Educators
We must try to help our clients understand that the economy and the financial markets —perhaps especially the equity markets — are two different things. We need to remember that our clients are paying us to help them understand different things. This includes helping them make sense of financial events. And one of the most confusing things about the financial markets is how they respond to economic data.
Right now, all eyes are on inflation. Recently, much of the financial news has focused on President Trump’s tariffs: Are they inflationary? Will they tank the economy? And, while the equity markets seem to be mostly shaking off such worries, our clients still want to know what we think. They are reading news headlines like “How Will Tariffs Affect Your Investments?” and “10 Stocks to Own if Tariffs Go Higher,” and they’re coming to us with questions.
We need to be able to discuss these matters calmly and in terms our clients will understand. We need to be able to explain to them that, first of all, tariffs are only one of many factors influencing the rate of inflation, in particular, and the U.S. economy in general. We need to understand and communicate to them that, while tariffs — if and when enacted — will probably exert upward pressure on the supply side of prices The tariffs may also exert downward pressure on the demand side, which can potentially have a balancing effect.
Additionally, we need to continue reminding clients that making changes in their holdings in an attempt to anticipate the short-term direction of interest rates, the CPI, and especially the equity markets is not likely to be productive for their portfolio performance over time.
We need to keep preaching “the gospel of diversification” and reminding our clients of the factors that are solidly within their control. Neither we nor they can exert direct influence on U.S. trade policy, Fed interest rate decisions, or the rate of unemployment. But what they can control — with our help — is their level of exposure to market risk, the appropriateness of their asset allocations, and their level of diversification. Let’s help them understand the factors that are beyond anyone’s control, but keep them focused on the things they can control.
Kimberly Foss, CFP®, CPWA, is a senior wealth advisor with Mercer Advisors, practicing in the Sacramento Valley area. The opinions expressed by the author are her own and are not intended to serve as specific financial, accounting or tax advice. All investment strategies have the potential for profit or loss. Diversification does not ensure a profit of protect again a loss. . Mercer Global Advisors Inc. is registered with the SEC and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Click here for a full disclaimer.
