Why Stock Market Volatility Has Officially Arrived

Looking at what’s going on in the economy reveals the reasons why the markets have entered a period of wide swings.

Volatility is the name of the game, and we don’t know when it is going to end. The Dow dropped more than 1,000 points two days within the same week: Feb. 5 and Feb. 8. Concerns over the bond market and inflation are capturing headlines, too.

There is an inverse relationship between interest rates and the value of bonds. In other words, the price of the bond falls when the interest rate rises. Thanks to quantitative easing after the 2008 market decline — a program by which the Federal Reserve sought to stimulate the economy by buying Treasury bonds and mortgage-backed securities — interest rates have remained artificially low for about 10 years. Until now. The Federal Reserve is committed to slowly unwinding the 2008 stimulus program. Former Fed chairwoman Janet Yellen started small interest rate hikes during her term, and her newly sworn-in successor, Jerome Powell, plans to follow suit.

The Deficit

My economic concerns about the prospect for stock market volatility extend far beyond interest rates. The U.S. federal deficit is out of control. In fact, current estimates indicate a $1 trillion deficit by 2020.

I recently published two articles on 2017 tax reform, showcasing the benefits to individuals and businesses. But I failed to articulate how this historic tax package would be funded.

If you’re ever short on money, you have four possible solutions:

  1. Increase your income
  2. Cut expenses
  3. Sell an asset, or
  4. Borrow more

Let’s take a look at each in the context of funding the Tax Cuts and Jobs Act of 2017.

Raise More Revenue

President Trump is optimistic that the deemed repatriation of accumulated foreign earnings — triggered by the lowering of corporate tax rates to 21% from 35% — will raise a sizable amount of revenue in the short-term. However, it is anyone’s guess if that tax revenue will actually offset lucrative tax breaks.

Slash Funding

If you are a retiree taking Social Security, or on the cusp of it, you may be concerned about benefits being cut. And rightfully so. The outlook is bleak for the federally funded program, which is already in trouble.

According to the Committee for a Responsible Federal Budget, Trump’s second 2019 budget proposal has a total of $3.1 trillion in budget savings relative to current law. Fortunately, there do not appear to be any direct cuts to Social Security in the recently proposed budget. Also, Medicare policies in the 2019 budget improve efficiency and value of care rather than cutting benefits to beneficiaries.

Even with these changes, deficits would rise to over 4% of gross domestic product (GDP) for the next couple of years, up from 3.5% currently. Additionally, the budget calls for a 42% reduction in non-defense discretionary spending over the next 10 years that many experts view as unrealistic.

Balance Sheet Items

The last two solutions in my list above, sell an asset or borrow more, relate to the balance sheet. Income and expenses, the first two solutions, are apparent on an income statement.

Have you ever looked at the Fed’s Balance Sheet? Section 5 outlines the Consolidated Statement of Condition of All Federal Reserve Banks. The Fed is reporting over $4.4 trillion of assets as of Feb. 7, 2018. Most of these assets are U.S. Treasury notes and bonds, plus mortgage-backed securities.

U.S. currency represents $1.6 trillion of Fed liabilities, and deposits held by depository institutions (i.e., banks and savings associations) constitute an even larger portion of the Federal Reserve’s liabilities.

The Federal Reserve system is the U.S. central bank. Its employees promote the effective operation of our economy. So, unless you or I go to work for the Fed, we don’t have much say in which assets to sell or how much to borrow.

Some Final Thoughts: What Investors Can Do

I did not write this article to scare you or say we’re headed towards another bear market. I don’t have a crystal ball, and neither do the economists.

Instead, focus on the things that you can control. Re-evaluate your time horizon. See if the level of risk you’re taking in your investment portfolio matches the volatility you can actually stomach. Also, focus on long-term goals, such as charitable giving, education funding or financial independence.

About the Author

Deborah L. Meyer, CPA/PFS, CFP®

CEO, WorthyNest LLC

Deborah L. Meyer, CFP®, CPA/PFS, CEPA and AFCPE® Member, is the award-winning author of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deb is the CEO of WorthyNest®, a fee-only, fiduciary wealth management firm that helps Christian parents and Christian entrepreneurs across the U.S. integrate faith and family into financial decision-making. She also provides accounting, exit planning and tax strategies to family-owned businesses through SV CPA Services

Most Popular

5 Beaten-Down Stocks to Buy on the Dip
stocks to buy

5 Beaten-Down Stocks to Buy on the Dip

The market has delivered some nauseating volatility of late. The good news? That has teed up a few great stocks to buy at a discount.
September 27, 2021
10 Best Stocks for Rising Interest Rates

10 Best Stocks for Rising Interest Rates

The 10-year Treasury yield is hovering near its highest level in months. Here are 10 of the best stocks to buy in a rising interest-rate environment.
September 30, 2021
13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
October 4, 2021


Robo-Advisers: Weighing the Worth of Automated Advice

Robo-Advisers: Weighing the Worth of Automated Advice

Some people do just fine with bare-bones advice that’s essentially generated by an algorithm. Until your financial life gets more complicated, you mig…
October 17, 2021
6 Things You Can Do Right Now to Ensure Your Money Will Last in Retirement
retirement planning

6 Things You Can Do Right Now to Ensure Your Money Will Last in Retirement

Your retirement plan needs to take a holistic approach. Because there are so many decisions to make, it’s easy to get lost in the weeds. Follow these …
October 15, 2021
10 Least Tax-Friendly States for Retirees

10 Least Tax-Friendly States for Retirees

When it comes to state and local taxes, retirees in these states are likely to pay more than retirees in other states.
October 14, 2021
Social Security Earnings Tests: 5 Things You Must Know
social security

Social Security Earnings Tests: 5 Things You Must Know

If you’re still working and claim Social Security early, your benefits could be reduced, at least temporarily.
October 13, 2021