With the midterms nearing a conclusion, we can all get back to normal, whatever that may be. On the surface, one thing seems certain, Wall Street will be making money. Markets rarely react well to uncertainty, so the political gridlock that happens with a power split (House vs Senate) is normally a favorable/market friendly outcome as new measures from the administration are stifled by the opposition. History tells us that a split congress sees an above average S&P 500 annual return over 13%. In fact, since the 1950’s a Republican congress under a Democrat president has been the strongest environment for stocks averaging 16+%.
However, unlike global economists, and their reliance upon history, I’m not putting any faith into mid-term results at this point. When we look at all the factors at play, high inflation (which some speculate may run a good portion of this decade), the war in Ukraine, & the ongoing effect of Covid, election results are meaningless. The downside of that split government I mentioned could mean a long cold winter. If the debt ceiling needs to be raised negotiations between the parties would stall and the fiscal response would be smaller, deepening the length of this recession in waiting.
Inflation is hard and often confusing for entrepreneurs and business owners. If inputs are increasing, do we pass that on to the customer? Change our business model? Account for people buying less? Two scenarios have unfolded: businesses with increasing inputs raising their prices, and businesses without increasing inputs also raising their prices, perceived inflation becomes real if you will.
Inflation confronts the average person with the “poverty wedge.” Groceries are up, your rent skyrocketed and whether you’re a 9-5-er or an entrepreneur, it’s likely your income didn’t increase to match and if you’re stuck in that triangle, you’re legitimately getting poorer over time. While the Fed is encouraged by the latest CPI report (Consumer Price Index) beware we’ve seen false readings before, including as recent as 2021 when after a brief slowdown, price gains accelerated with a vengeance. What that translates to is expect additional rate hikes perhaps two more @ 50 basis points each.
Although the rich and really rich are far better equipped to handle these storms than the rest of us, their strategies are replicable. Many of their strategies can not only help you preserve your wealth but grow it amid all the chaos. First and foremost do not pilfer that 401k! You have to take a long-term perspective, while it may take time, things will recover.
The rich aren’t running for the hills. Some continually reinvest, even as things get cheaper and cheaper, and they’re taking a 10-15 year horizon, not a 10-15 month horizon. But don’t get caught up in playing “let’s pick the bottom in the stock market” (like Crypto), as nobody knows where that bottom is. Betting on real estate? Well, many of the institutional groups we are familiar with are estimating multifamily housing starts may decline by 40% year over year in 2023 and perhaps the same for single family home building! Look, I think if you’ve been around the real estate game for a minute, you know this is not going to be another 2008. Well except for all the gurus and coaches coming out of the woodwork. There will be great opportunities to capitalize if you have the structure, specific acquisition strategy and processes in place. If we follow the money, affordable housing is where it’s at. JP Morgan and Haven Realty launched a $415 million equity joint-venture that aims to acquire and develop more than $1 billion in new BTR communities nationally. A whole new type of flipping is taking place as developers are selling entire communities to operators like Haven to lease to residents who can’t afford to buy.
Our decision making process is often affected when we are challenged with the task of surviving rather than thriving. But if you plan on being around after the dust settles, you must maintain your composure, refine your processes, trim the fat & maintain a long term outlook.
Not sure what to do during this cycle? Invest in YOU! One of the things I’ve realized over the years is in general we have a blind spot when it comes to seeking a valuable growth path, and that’s our own IRR (internal rate of return). You can learn a new skill, relocate to where you may earn more, or modify your office to increase output. Take that cash and double your video export with a new editor. Invest in a new lighting package to increase quality. Build out that podcasting room and start your “expert series”. Collaborate with a competitor, merge and expand, give yourself the potential to earn a massive multiple by investing internally rather than externally.
As an entrepreneur you should always be assessing your IRR before deploying your capital anywhere. What will make the difference for each of us is how we approach it. By coming at it in an informed way, with a strategic plan, you can weather the storm.
