While rising interest rates, market volatility, inflation and supply chain woes will likely continue into 2023, weathering a storm of economic uncertainty also presents opportunities to take stock and remain focused on big-picture planning, local financial advisors say. Their biggest advice? Adopt an active, rather than a reactive, approach.
Lesley Fluke
Lesley Fluke, Central Kentucky regional president of Field & Main Bank, said clients are worried about economic influences on profit margins and operating expenses.
“The conversations that we are currently having with our clients is, first and foremost, the impact that increasing interest rates are having on them,” she said. “Rising interest rates can diminish a company’s access to capital that it needs to support its daily operations. Rising interest rates also naturally slow down the economy and reduce the demand for goods and services, which can further negatively impact cash flow.”
She recommends that businesses review their business plans and make necessary adjustments where needed, such as creating more efficient daily operations, reducing expenses where possible and possibly renegotiating vendor terms if needed.
“Of course, some people are nervous,” she said. “We try to have proactive conversations throughout the year [with clients] to talk about business owners’ goals and what they need to implement their plans.”
Now, she said, is the time to review business plans, look at accounts receivables and collection processes, and look at potential working capital lines of credit to make sure the business can support its daily operational needs.
While reports of a coming recession, or the economy already being in one, loom over the new year, John Boardman, founder and CEO of Ballast, said a recession isn’t necessarily bad. Recessions, he said, are necessary for a healthy economy.
“The severity of [a potential] recession is very debatable,” he said. “People get so caught up with the term recession when in reality it is a healthy development in long-term economies. You have to have recessions. It’s just part of the cleansing process that an economy has to go through at some point,” he said. “It’s not fun, but it is actually a very healthy development for markets, and I think long term, very constructive for healthy markets to operate.”
Still, he said, now is a time to be financially conservative.
John Boardman
“We have consistently advised our business owners, particularly those in economically sensitive industries, to be a little bit more conservative with their cash, not looking to borrow a lot of money in this environment,” Boardman said. “But at the same time, I think sometimes people overreact to the fear of a potential negative economy. These can be good opportunities to invest back in your business for growth. A lot of the greatest companies in this country were founded during recessions, and I think not overreacting to the anxiety related to a potential recession has typically served people very well over time.”
The recession, he said, will correct trading prices and flush out complacency in the market.
But rising interest rates will provide conservative investors with more opportunity, he said.
“The one benefit to interest rates going up is that savers and conservative investors can now actually attain a reasonable rate of return on their investment,” he said. “We’ve seen a lot of investors drift to more aggressive portfolios over the past several years, as interest rates have continued to tumble lower. Now that they’re moving higher, I think there will be a number of opportunities ... where [those who prefer less aggressive investments] can finally create some yield.”
It’s important, however, not to make big, risky moves out of discomfort.
“From a financial planning standpoint, we tell people consistently don’t overreact to a short-term situation,” Boardman said. “If we do face a recession, it’s not going to last forever. The biggest mistake investors make is making short-term decisions to make themselves feel better today, but they may be hurting themselves in the long run.”
James Fereday
James Fereday, senior vice president and chief investment officer at WealthSouth, said the rapidness of the changes in the economic landscape is what has spooked so many people.
“I think the speed at which both inflation and interest rates have gone up is what’s unsettled people the most,” he said. “Investors are trying to grapple in a very short time with this new landscape ... it’s a different landscape from just eight months ago, or 12 months ago.”
Fereday said WealthSouth believes inflation has likely peaked and that interest rates will ease a bit in 2023. Long-term rates have already dropped, he said, while short-term rates have remained higher than long-term rates, indicating a slowdown is coming.
“We’ve counseled our clients not to make any major moves in this kind of market turmoil,” he said. “If you didn’t have the right mix of assets, or the right asset allocation going into this bear market, it’s probably not the best time to make major adjustments.”
WealthSouth is also advising its clients to look at their spending to see where adjustments can be made. Rising prices erode spending power, necessitating those cuts, he said.
“When you see your portfolio is going up, year over year, year in and year out, it’s a lot easier to spend more,” he said. “But we are pushing clients to take a look at their budgets, take a look at their spending patterns right now, in light of the higher rate of inflation out there.”
Whatever your plans, Field & Main’s Fluke said, it’s important not to put off making them and not to make them alone.
“Procrastination can be costly,” she said. “Consistency is important, but review business plans each year for relevancy and re-execute as soon as changes are needed.”
She said that working with a team of trusted advisors who will ask insightful and tough questions will help you achieve those goals.