I think one of the most critical things I’ve learned in recent years is the importance of learning to live in nuance. I’ve had a lot of conversations with clients and friends in recent weeks about the nature of the economy and one of the things that I often try to intone is that the economy, like so much of life, is nuanced. It’s very rarely “this or that.” It’s much more often “this, and also that.” This can be a difficult reality to comprehend, and yet we see diametrically opposed things held in the same hand often – the economy isn’t an exception there. Such is the nature of something that is bittersweet. It can be sunny out, and also cold. I can be happy for one friend, and also sad at the same time for another. The economy can show strong data points, and also there can be economic factors that are unfavorable.
I recently told a friend that I often think of the economy as a giant, colorful parachute, the likes of which often make an appearance in elementary school PE classes. The parachute is unfurled and 20 or so kids grab on. What happens next is really anyone’s guess. The parachute may ripple because one child lifts their arms. It may be dragged slightly to the left by a bigger child who is feeling extra energetic that day. A couple kids may sit down and the parachute may slant. The point is, there are so many different variables pulling on the parachute, that it is often unclear where and how it will move.
Such is the economy. There could be two variables impacting it that are opposed, but they may both move in the same direction based on a stronger third variable. There may be factors at play that we’re not even aware of yet, that may surprise to the upside or the downside. This past year, we saw GDP growth nearing 2.8% and unemployment is just above 4% - both statistics that are suggestive of a strong economy. At the same time, the Federal Reserve this week indicated that they would not be cutting rates as significantly as they had previously signaled because inflation has been stickier than they were expecting.
Not only can we hold the nuance of these two data points, but we can also further explore their relationship. A strong economy leads to higher consumer spending which, by the simple nature of the laws of supply and demand, can cause inflation. And thus, both things can be true – consumer spending can be strong, and also cause inflation to rise, which makes things more expensive. All this to say, as we prepare for 2025, I think it’s important to remind ourselves that there are a lot of factors at play, and that we have little control over many of them. What we do have is our ability to respond.
At Sherwood, one of the things we do every January is read through all of the economic outlooks by the economists and fund managers that we follow and then Matt and I will debate the merits of their predictions – which is what they are, educated predictions. No one knows what will happen next year, and it’s important that we are careful about how much of the present we try to project onto the future. Instead, we try to explore what could happen, the likelihood of those events, and how our plans and portfolios would respond. In doing so, we conduct a stress-test of sorts, and then we make any modifications that we deem to be beneficial across those range of possibilities in light of their likelihoods. And then we let life unfold.
Many years ago, Matt and I attended an investment conference where one of the speakers made the statement that our job as financial professionals is to play the hand we are dealt. As we look to another year, we are reminded that we have little control over the cards that we are dealt, we are not the dealers after all. But we can control how we play the game – how we respond. Our goal is to do so in a way that continues to safeguard the legacies that our clients have built, in part by being able to grasp the nuance of an economy that faces many different variables. We do that by constantly challenging our own biases, learning from a variety of perspectives, and then crafting an investment strategy that can weather multiple environments. If you have any questions about that process or would like to know more about how it specifically applies to your situation, we’d love to have a conversation with you. In the meantime, we look forward to sharing our thoughts on 2025 with you soon!
“Civilian Unemployment Rate.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm. Accessed 23 Dec. 2024.
“Real GDP Growth.” IMF, www.imf.org/external/datamapper/NGDP_RPCH@WEO/USA?year=2024. Accessed 23 Dec. 2024.