Mixed signals: How to explain economic confusion to your clients

Help guide your clients through a complex environment

What’s going on with the economy? Inflation’s going down, so everything must be good, right? On the other hand, interest rates are still high and housing prices throughout most of the country are at historical highs. Many other statistics appear contradictory as well. The dissonance of the data is enough to make investors head spin.

Most likely, your clients are feeling this way and may be turning to you for guidance. The problem, though, is that there’s no simple explanation. So what should you tell them?

First, cover the basics

Before you dig into the nitty gritty, it’s vital to educate clients about some foundational economic concepts and how they can affect the financial markets:

• The level of interest rates—both actual and expected—can affect everything from supermarket prices and credit card payments to bond yields and the unemployment rate.
• Yields and prices of bonds move in opposite directions. This is because when interest rates fall, newer bonds are issued with lower rates so existing bonds with higher rates will now cost more because the rates are more attractive than what is being offered now. Now, because the bonds with the higher interest rates will cost more, the overall effective yield will decrease.
• Many factors drive financial markets, but investors’ expectations about those factors tend to influence the behavior of markets more than the factors themselves. Stock and bond prices have surged since October 2023, for instance, based on expectations that the Federal Reserve had finished its latest cycle of raising interest rates.

Contradictions are normal

"Demystifying the situation should help not only to relieve some of the uncertainty, but also to remind them that you’re there for them..."

The first step in explaining the current economic picture is to reassure clients that it’s normal for various indicators to conflict with each other. Old expressions like “markets climb a wall of worry” or “good news is bad news” remain in the investment vocabulary for a reason: They’re often true.

2021 is a good example. The unemployment rate had been falling since its COVID high of 14.7% in April 2020, and annualized inflation (as measured by the Consumer Price Index) had steadily risen since May 2020. Combined, these numbers were a neon-light signal that economic growth was going to plummet and stocks were heavily overvalued. Yet stocks kept climbing this wall of worry and the S&P 500 ended the year up 26.9%.

More recently, the 10-year Treasury yield rose an eye-popping 1.5 percentage points between April and October of 2023 as investors confronted the possibility that interest rates would stay higher for longer into the future. If correct, this could translate into a prolonged bout of inflation―but inflation kept dropping.

The catalyst: COVID

Once you’ve explained that contradictions are normal, try to put today’s environment in perspective. Much of what’s happening in the economy now can be traced to the COVID pandemic starting in 2020.

Global supply chains broke down, forcing prices of many products and their key ingredients to sharply rise and their availability to dry up. Manufacturers raised prices to keep pace as their own costs surged. At the same time, the government went into overdrive to keep the economy afloat: The Federal Reserve cut interest rates to nearly zero, and Congress approved several programs that put cash directly into the hands of consumers.

In other words, powerful forces were working simultaneously to depress and stimulate economic activity—a pattern that persists today. The Fed, for instance, sought to crush inflation and reduce economic growth by raising interest rates more than 5 percentage points between March 2022 and July 2023. Just about everyone on Wall Street and Main Street alike expected a recession, yet it hasn’t happened. GDP growth returned to healthy levels in mid-2022 and hasn’t looked back.

This narrative is simplistic, admittedly, but it isn’t simple. Hearing it should give clients a better grasp of the story and the understanding that it’s complex.

Helping clients in several ways

Your explanation should help clients in several ways—meaning that it also benefits you and your practice.

First and foremost, you’re addressing what’s likely an area of widespread concern. The past few years have seen a tremendous amount of uncertainty about the economy that has weighed heavily on clients’ minds and wallets. Demystifying the situation should help not only to relieve some of the uncertainty, but also to remind them that you’re there for them and have a finger on the pulse of what’s affecting them.

Second, you’re educating them about how both the economy and the financial markets work and how the two are closely linked. This knowledge gives them a better grasp of what’s going on and, as a result, a deeper understanding of their own investments. Their confidence in you as their producer should grow.

Finally, you’re reinforcing their belief in the long-term plan you’ve developed for them—and reminding them that they need to stick to the plan despite relatively short-term volatility. Making sense of the big picture enables them to see their plan in perspective and feel better about it.