The Federal Reserve has been the primary focus of the markets following the 2020 COVID-19 market crash, as generous spending bills have resulted in a massive increase in the overall money supply. To combat this, the Fed has continually increased interest rates to combat rising inflation. While this has been mildly successful, with inflation only rising 6.5% in December, it poses an entirely new challenge.
What happened: Since 2020, the U.S. debt has increased by $8 trillion, with several record-breaking spending bills since former President Donald Trump’s first landmark COVID-19 spending bill — the Coronavirus Aid, Relief and Economic Security (CARES) Act. This brought the total federal debt to over $31 trillion.
With the current Fed Funds rate at 4.25% to 4.5%, that puts the estimated yearly interest payment on the nation’s debt at over $575 billion for 2023. For comparison, the U.S. paid roughly $475 billion in 2022 and $352 billion in 2021.
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As this number continues to spiral, there’s no clear answer on how to get it under control. If the central bank begins printing more money to repurchase the debt “that’s how you get hyperinflation,” Treasury Secretary Janet Yellen, former chair of the Fed, said in a 2019 investors conference.
What investors can do: Inflation is a difficult concept from an investing perspective. You can’t hold cash because you’re losing purchasing power while you wait for inflation to pass. With inflation rates hitting as much as 9.1% in recent years, you’re effectively losing a substantial amount of money by holding it. But as markets have shown, the uncertainty causes high-growth stocks to decline substantially, and inflation can hurt margins, causing earnings misses and stock declines. Rising interest rates also could begin to cripple any company already struggling or relying on debt to fund growth and operations.
Traditionally, one of the best ways to weather this storm is investing in companies focused on products or services that are in high demand regardless of economic conditions. For example, healthcare companies have performed well compared with the overall market. UnitedHealth Group Inc. is up 2.8% in the past year, despite many companies declining in the same period. UnitedHealth also has a yearly dividend of $6.60 per share further adding to its performance.
For those with a longer investment timeline and higher risk tolerance, startups can also be a strong option. Valuations are currently suppressed and many don’t have debt because they raised funds from venture capital or retail investors. Sensate, for example, is a startup raising on Wefunder, which means anyone can invest for a limited time. The startup has created a patented solution to stress relief and raised over $2 million from everyday investors and venture capitalists.
Other easily recognizable brands like Walmart Inc. can be strong options, depending on your investment thesis. As the Fed works to address these issues, investors can look to both find value in suppressed companies and pivot to safer options until a clearer plan is in place to address these concerns around the looming national debt crisis.
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