A “Shock” To The Financial Markets - We’ve Seen Them Before

 Reflect on the past 30 years: we’ve experienced the dot-com boom and bust, the devastating events of 9/11, the Iraq War, the Great Recession, COVID, and now our current crisis. Despite these challenges, the average annual return of the US stock market from 1996 to 2025 is 11.0%¹. Let’s look even further back — 30 more years — encompassing the Vietnam War, the '70s oil embargo, the Iran hostage crisis, and the double-digit interest rates and inflation of the ’80s. Over the past sixty years (1966-2025), the average annual return was approximately 10.5%¹.
¹ S&P 500 Index

We are still in the early stages of the Middle East conflict, and as time passes, we may face additional shocks. However, like the other events mentioned, this situation will eventually be resolved; we don’t know how or when. It is because of these unpredictable and unexpected events that stock returns tend to outperform those of less risky investments. The sound investment principle of remaining disciplined applies here, but it ultimately depends on your time horizon, financial goals, and risk tolerance.

Several factors are at play in the current crisis that will likely impact the economy and investment returns. Here are a few:

Energy Prices
Oil prices continue to rise and will undoubtedly begin to impact household budgets. The extent of the damage or the duration of the elevated prices is unknown, but it appears they may last longer than expected. It is not just the increased cost of gas and oil that will impact the economy; production and manufacturing companies will also feel the pain, likely leading to higher consumer prices.

Inflation
The condition of “Stagflation” could be far worse than just rising inflation. Normally, price increases result from higher spending, higher wages, and strong labor demand. But what happens when there is no increase in spending, wages, or employment gains, yet prices keep climbing? Inflation during a recession? That’s called Stagflation. Not ideal. 

Interest Rates
We were soooo close to lowering interest rates just a few weeks ago. A rate reduction would have been a positive catalyst for the housing industry at the start of the most popular time of year to buy homes – Spring! Instead, this past week, mortgage rates increased above 6.20%.

The paradox for the Fed exists because, traditionally, higher prices have prompted the Fed to consider raising interest rates, which is supposed to “slow down” a “hot” economy. Lowering rates in response to an economic slowdown would be preferable, but I don’t think the Fed will cut rates given emerging inflation risks. Either way, raising or lowering interest rates would not solve the core issue of prices; instead, our near-term foreign policy will influence future prices.

Please review my website for more information about my company, and feel free to call (925) 484-1671 or email me to ask a question about your situation, my services, or to schedule a no-charge consultation.

Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with managing an actual portfolio.

Anthony B. Carr,

CPA, CFP®, MBA