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Economists Reflect on Lessons From a Chaotic Year – Presented by Mark K. Lund, Financial Advisor in Utah

Financial Advisor UtahWhen there’s a major earthquake in a coastal region, geologists can predict several things. First, there will very likely be aftershocks in the same location. And second, there’s a good chance of a resulting tsunami.

In both cases they can’t predict how severe these after effects will be nor how widespread their consequences. But they know that these phenomena are often likely to follow an earthquake.1

On the other hand, the initial tremor itself is completely unpredictable. Even though earth scientists understand much of an earthquake’s underlying causes and have identified locations where they seem most likely to occur, there’s no way of knowing with certainty and sending out a warning before one happens.

Geologists are much better at analyzing and making sense of seismic data after an earthquake.

The same goes for economists. More than two hundred years of studying data has given these money scientists a good understanding of how economies work at the macro level. But, like geologists, economists can’t consistently forecast with precision when disruptive events will occur, nor how severe their aftermath will be.2

Olga Bitel is a global strategist and Hugh Scott-Gall is a portfolio manager and co-director of research at William Blair Funds. Both are trained economists, and both were brave enough to assess the accuracy of their previous forecasts for 2022 at the end of the year.3

Keep in mind that they had been trying to predict economic conditions at a very broad level, not stock market performance—let alone picking individual winners and losers.

Bitel says that their prediction of slowing growth had been on track, but other factors, such as inflation, were more severe than they had expected.

“Inflation was so strong not the least because it was exacerbated by geopolitical tension,” writes Bitel. The suddenness of the Russian invasion of Ukraine created a psychological “inflationary impulse.” Then when the conflict forced Europe to find new sources of oil and gas at two to three times what it had been paying, global inflation took hold for real.

This in turn led to another event not generally predicted by economists: the aggressive rate at which the Federal Reserve raised interest rates. Bitel and Scott-Gall were expecting the Fed to gradually increase rates until they reached the so-called neutral rate (the nominal rate minus inflation). But they were not thinking it would happen in a six-month window nor with consecutive 75-basis-point hikes.

Once they saw the Fed’s actions, they were expecting a significant “credit event,” an aftershock caused by tightening credit. However, they can’t say with any certainty if this was the crypto collapse, the balance-of-payment difficulties in some emerging economies, or whether this event is yet to happen.

Even when looking at the global economy in general, and identifying the factors that are likely to come into play, it’s still difficult to predict what will actually take place.

As Scott-Gall explains, “Some major events happened that very few people expected. Others were more foreseeable, but they might not have played out exactly as forecast.”

The prudent investor won’t be discouraged by this stubborn unpredictability but will rather accept it as a fact. Instead of trying to time the market or pick winners, he or she will take a diverse approach with a long-term goal, and stick with the unique plan developed by their trusted advisor.

If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.

Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc., A Financial Advisor in Utah
11576 S State Street, Bldg. 1002
Draper, UT 84020

Sources:
1. http://go.pardot.com/e/91522/wiki-Earthquake/92qw1n/1800335752?h=DQ4_EXAWKbgIAkHxZBQB35zXThRxmHAzmlR09Ik4Njw
2. http://go.pardot.com/e/91522/ba-4fc8-40d0-ab29-1874c70e0d8c/92qw1r/1800335752?h=DQ4_EXAWKbgIAkHxZBQB35zXThRxmHAzmlR09Ik4Njw
3. http://go.pardot.com/e/91522/l-lessons-from-a-chaotic-year-/92qw1v/1800335752?h=DQ4_EXAWKbgIAkHxZBQB35zXThRxmHAzmlR09Ik4Njw

Disclosure:
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

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