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With high inflation and rising interest rates fueling speculation of an impending recession, it may come as no surprise that financial advisers are hearing these concerns from their clients.
Annual inflation eased slightly to 8.3% in August from 8.5% in July, but remains well above the Federal Reserve’s target rate of 2%. The central bank raised a key interest rate by 0.75 percentage point in September – for the third straight month – to fight inflation, and further hikes are expected.
We spoke to experts at CNBC’s Financial Advisor Council to see what they discuss with their clients.
So what’s a big concern for customers in this economic environment? “What the work environment will be like and what the risk of unemployment is,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, whose clients are mostly between the ages of 28 and 42.
“At this point it’s speculation,” Boneparth said. “It’s hard to point to any data that says we have anything to worry about now.”
Unemployment Rate Remains Low: The latest data from the US Bureau of Labor and Statistics shows the unemployment rate at 3.7% for August, up slightly from 3.5% in July.
Memories of the Great Recession remain
However, some customers have memories of the Great Recession of 2008-2009 and the widespread job losses that came with it. In December 2007, before the economic problems caused by the financial crisis, the US unemployment rate was 5% according to the BLS. It peaked at 10% in October 2009 – a few months after the recession officially ended – but it took until 2015 for it to level off again at 5%.
Boneparth said concerns about the job market are mostly coming from clients working for startups, which are largely technology-related.
“If you work for a venture-backed company and the last round of funding you raised was six months ago and you’re entering a more difficult fundraising environment, you should think about that risk,” Boneparth said.
Ditto for someone considering leaving a secure job for a higher-risk one, he said.
High home prices also create fear
High home prices – coupled with an average 30-year mortgage rate of 6.8% on Sept. 28 versus 3.3% in early 2022 – are also a concern.
While there are signs the housing market is cooling off, high prices and rising mortgage rates are still worrying prospective buyers.
One of CFP Louis Barajas’ clients recently moved to Miami from Southern California and discovered a housing market that didn’t look much better than the one he moved from. In Los Angeles, the typical home — ie, the middle row of homes — sold for about $972,800 in August, according to Zillow’s Home Value Index. That equates to $356,000 nationally.
According to Zillow, Miami-area home prices rose 30.7% year over year in August, compared to 15.8% for the country as a whole. The typical Miami home sold for $560,200 last month.
“My client couldn’t believe how expensive homes are in Miami,” said Barajas, president and partner at MGO Private Wealth in Irvine, California.
The client plans to delay buying a house in the hope that prices will come down.
“Some clients remember the 2008-2009 recession when property values fell sharply,” Barajas said.
Fear of market volatility weighs on some customers
Meanwhile, some clients are concerned about stock market volatility — particularly those who are retired and rely on savings to fund their after-work years.
The S&P 500 Index, a broad measure of U.S. company performance, is down more than 14% in the 12 months ended Sept. 28. The Dow Jones Industrial Average is down more than 13% during that time and the tech-heavy Nasdaq Composite Index is down more than 23%.
“My clients’ biggest concern is the uncertainty in the world,” said CFP Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Fla. “You’re wondering what’s next and how that would affect the market — so it’s about the fear of market volatility.”
For older clients, their portfolio risk is already low, “so market volatility won’t impact their life goals,” she said. “But we’ve had three or four retirees lately who wanted to know if theirs [spending level] in order.”