PEORIA MAGAZINE November 2022

W elcome to Peoria Mag azine’s Econ Corner, a recurring feature in whichwe pose questions to experts about various economic issues and how they affect our lives and careers here in central Illinois. This month’s participant is returning contrib utor Dr. Joshua Lewer , Chairman of the Department of Economics andMcCord Professor of Executive Management Development at Bradley University. Peoria Magazine (PM) : There have been some 25 “bear markets” on Wall Street – generally defined as a value downturn of 20% or more – since the Great Depression, and five so far this century between the dotcom crash, 9/11, the Great Recession in 2008, COVID and the current inflationary situation. The Wall Street Journal recently ran a story under the headline, “Don’t Give Up on the Stock Market.” Is investing any riskier than it ever was? Are there reasons to be hopeful regarding a rebound? Joshua Lewer (JL): Long-termcapitalism is a powerful environment for us to earn the rewards of capital markets. I can’t forecast if we have hit bottom or if we will see amuch bigger drop in the short run. But what I know for sure about bear markets is one, they all end; and two, recent market declines bode well for higher long-term future returns. Investing in stockswill always be risky, especially since most underperform the market overall long term. People need to reframe volatility with risk. Volatility is a temporary decline. Risk is a permanent loss to capital and/or not meeting your financial goals. You can mitigate equity risk through broad, low-cost diversification with index and asset class ETFs allowing you to own thousands of stocks. My friend and fee-only fiduciary in Peoria Heights, Mike Mahoney, always says, "Focus on what you can control, mainly asset allocation, costs and taxes." A key takeaway for investors is not exposing one's portfolio to any more risk than they are willing and need to assume to reach all their goals.

PM : The average 30-year mortgage rate has eclipsed 7%, the highest in 14 years, since the subprime mortgage fiasco of 2008. Monthly mortgage costs on an average-priced home, 10% down, in the U.S. are now $1,000 higher than they were in August 2021. As a result, fewer people are buying and selling. What’s the relationship between what’s happening in the housing market and the prospects of sliding into recession with all of its attendant consequences – higher unemployment, etc.? JL : While there are many potential scenarios the economy could take during this time of quantitative tightening (QT) and rising interest rates, the most likely outcome is recession. I'm sorry to say this, but we have never had a meaningful inflation spike that didn't endwith some pain. At his Aug. 26 Jackson Hole speech, (Federal Reserve Chairman) Jerome Powell plainly stated that “… pain for households and businesses are a price to pay for bringing down inflation.” And, yes, housing starts are definitely an important leading economic indicator. They are clearly telling us that a slowdown is coming. As the graph on the right reports, recessions occur when the monthly supply/inventory of new homes tops 10 months. It has been a flawless recession indicator. PM : Conversely, consumer spending in other sectors – travel, dining, services, etc. — remains up, which could prompt further Federal Reserve action on interest rates. With the Fed trying to restrain an overheated economy, what explains the continued buying? JL : The answer is multifaceted, but I would focus on the resilient labor market and the fact that fiscal stimulus just keeps flowing. The major stock market pullback during the first week of October clearly came from the digestion of the strong September jobs report showing that payroll employment grew a healthy 263,000, unemployment fell from 3.7% in August to 3.5%, and wage growth grew at a robust 5%. This reinforces aggregate demand. The September

ECON CORNER

An Interview with Dr. Joshua Lewer Chairman of the Department of Economics and McCord Professor of Executive Management Development at Bradley University

INTERVIEW BY MIKE BAILEY

104 NOVEMBER 2022 PEORIA MAGAZINE