As the Covid-19 pandemic continues to ebb and flow, its impact has created a tumultuous, if labor-friendly job market. Those looking for work or to make a career change have never had it better. But how long will conditions hold? Careful, constant financial planning and analysis have never been more imperative for high-net-worth individuals looking to shield portfolios from the effects of this turbulent economic period.
Covid-19 has undeniably served as an earthquake for businesses across the globe. Within the U.S. and abroad, the pandemic has left an economic scar on every sector, one that will likely be visible for several years still to come. Currently, the most prominent economic effect of the pandemic might be the radical shift in the orientation of the labor market. Dubbed the “Great Resignation,” 2020 and 2021 saw workers across most sectors quitting their jobs at record rates. This exodus has sent shock waves through our economy, requiring proper financial planning and analysis that has challenged even the savviest investors during this uncertain period of flux.
High-net-worth individuals should consult a financial advisor for wise investment strategies to shield their portfolios from the onslaught of Great Resignation ripple effects. What do they need to know about the future of the global labor force? And what risk tolerance adjustments may be needed to achieve financial goals?
What Is The Great Resignation?
The onset of the COVID-19 pandemic saw millions displaced from their jobs. Businesses deemed ‘essential’ by lawmakers might have kept their doors open, but other work spaces were forced to either transition to a remote setting (if possible) or shut down. Laid-off workers had to consider career changes to keep afloat, while others tried to find a new work-life balance.
Some businesses shifted to accommodate these new changes—flexible hours, remote options that persisted after the initial wave, and more benefits, in some cases. However, many essential, entry-level, and low-wage industries (especially the hospitality and retail sectors) have resisted such structural changes. Consequently, many burnt out employees saw little motivation to return to or continue their jobs.
Others, using the disruption to evaluate their work history, chose to use the flux period to reorient their trajectory and find a new career all together. The social security provided by legislative relief efforts offered workers the financial cushion to look elsewhere, and so began a massive wave of voluntary two-week notices, also known as the Great Resignation.
By the end of October 2021, the U.S. Bureau of Labor Statistics recorded 11 million open positions. Over 4.2 million Americans quit their jobs in October alone! Harvard Business Review studies have found a significant portion of this resignation was driven by mid-career employees between 30 and 45 years old.
While permanent retirement among the Boomer generation has also played an notable role, these Millennial and Gen X resignations are the more complicated factor. They hint that the issue is not a job shortage. (Indeed, one of the mysteries of the Covid recovery has been the discrepancy between job openings and unemployment numbers.) Instead, as labor economist Aaron Sojourner says, it’s a job quality shortage. Rather than a natural exit from the workforce, these retirements indicate a sort of collective strike for better conditions.
“It’s a bit of a puzzle why employers aren’t raising wages and improving working conditions fast enough to draw people back in,” Sojourner said to CNN Business. “They say they want to hire people—there are 11 million job openings—but they’re not creating job openings that people want.”
The future trajectory of this Great Resignation is uncertain. As the Covid-19 pandemic continues to ebb and flow, its impact has created a tumultuous, if labor-friendly job market. Those looking for work or to make a career change have never had it better. But how long will conditions hold? Careful, constant financial planning and analysis have never been more imperative for high-net-worth individuals looking to shield portfolios from the effects of this turbulent economic period.
1. Consider The Impacts of The Great Resignation
While there are other associated forces that have caused the current economic uncertainty, the Great Resignation has undoubtedly played a part. Millions of people quitting their jobs complicates the flow of goods and money. Nonetheless, it’s key to understand why the discrepancy in employment numbers persists.
Businesses have openings, and those who have recently resigned their positions are willing to work. However, the exodus from their previous employer occurred for a reason. People won’t just stroll into a new job unless it’s better than what they had before. This creates competition among businesses looking to fill open positions—competition that must include higher wages, more benefits, signing bonuses, and growth potential to entice workers.
Employees now have greater leverage in demanding benefits and protections, inadvertently forcing managers and owners to comply in order to stay in business. Consequently, higher wages and bonuses could also lead to an increased cost of goods, as payroll is among the most significant allocations of any business budget.
However, the Great Resignation also paves the way for tech innovation. Some analysts believe many companies will pivot to an increased investment in automation. Updated technology could offset the labor crisis, as fewer workers become necessary to do the same amount of work. Therefore, watch for businesses offering automation services to perhaps see their stars rise soon—and their financial worth along with them.
2. Know Your Risk Tolerance and Capacity
The novelty of the Great Resignation’s effects on the market complicates much prior investment calculus, at least while we continue to assess the entirety of its impact. Understanding your risk tolerance and risk capacity is critical for sound financial planning and analysis, especially in an uncertain period such as this.
Risk tolerance is the amount of risk an investor is willing to take on. Think of this as an investor’s willingness to accept uncertainty in their investments. Investors with a higher risk tolerance are open to more volatile stocks with the potential for rapid growth.
Meanwhile, risk capacity is the amount of risk an investor must take to meet their financial goals. If your risk tolerance is high and you’ve set ambitious goals, you won’t mind the higher risk capacity required to achieve those goals. Contrarily, if your risk tolerance is low, you may need to lower your expectations.
A skilled financial advisor can assess your risk tolerance and chart an investment strategy that works with your goals. However, those calculations aren’t just about dollars and cents—risk tolerance isn’t necessarily how much you’re willing to lose. It’s your willingness to risk an unfavorable outcome for a more favorable one.
3. Consider Selling Stocks Before the Labor Shortage Hits Its Bottom Line
It’s no secret that some companies are more susceptible to the effects of the Great Resignation than others. Knowing which stocks to sell before their value decreases should be one of the keys to your financial planning and analysis strategy. It may sound like Investing 101, but these fundamentals still play an essential role—perhaps more so now.
Tracking metrics like labor intensity and labor skill can give you a sense of which industries will be least resilient in the face this fluctuation. Experts consider companies that rely heavily on their labor force to be labor-intensive companies. Labor skill then dictates the degree of training an employee needs to perform the job. Whether from higher education or on-the-job learning, highly-skilled employees are harder and more expensive to replace. Therefore, a company reliant upon a large, highly-skilled workforce may be more susceptible to loss amid the Great Resignation. The bargaining power effectively shifts to the employees.
With this understanding of labor measurement at hand, you can calculate a company’s revenue-per-worker metric to determine if that investment is Great Resignation-proof. A low revenue-per-worker metric would suggest individual employees are more relevant to a company’s bottom line, versus a high revenue-per-worker metric. For example, the Healthcare and Energy sectors maintain much higher revenue-per-worker numbers than the Industrial and Consumer Discretionary (CD) sector —since each employee is relative to a larger portion of the company’s profits.
As such, CD is a sector investors may want to consider selling as the Great Resignation carries forth. Fast-food and big-box retail businesses like McDonald’s and Walmart have had particular difficulty hiring low-wage positions during the pandemic. To deal with rising labor costs, McDonald’s expects prices to increase by 6.6%. McDonald’s also partnered with IBM to automate their drive-through lanes. Meanwhile, a resistance to rising wages and staunch anti-unionization position has seen Walmart shed employees to competitors with more robust worker protection and compensation packages. Plan your investments in such businesses according to the research you conduct on their latest news, with eyes open to the realities they are facing.
4. Explore New Stock Opportunities
While several sectors suffer in the Great Resignation’s wake, others have taken advantage of the employee pool. They’ve hired top talent from other industries and continued to thrive, while others lag behind. Look into the companies who have effectively capitalized on these events when planning financial investments.
Many companies shifted online as the early phase of the pandemic forced people to stay inside. Accordingly, eCommerce has skyrocketed through 2020 and 2021. Many eCommerce companies reported substantial third-quarter growth and record earnings. This suggests companies with an eCommerce focus could prove to be stable, wise investment vehicles throughout the Great Resignation.
Interestingly enough, eCommerce companies may also be thriving due to indirect benefits from the Great Resignation. Many people who resigned from their jobs turned to their own creative outlets and dreams to generate income while between jobs—leading them to the eCommerce spaces who offered them virtual means to sell their work.
Similarly, platforms catering to freelance work have also seen benefits in this time. While the rapid growth of the freelance market appears to be slowing, the Great Resignation could still steer more resignees towards freelancing. And while you can’t invest in freelancers themselves, you can still consider investing in the middlemen.
Finally, staffing companies may also prove to be a quietly fruitful investment vehicle. If millions of Americans quit their jobs, and millions of jobs remain open, staffing companies have no shortage of clients. Some believe the Great Resignation may be better understood as a Great Reshuffle. Once the en masse resignation abates, people will take jobs suited to their personal needs—or so the logic suggests.
5. Protect Yourself Against Inflation
The current rise in inflation is caused by a number of complex, interlocking factors—the Great Resignation is only one among them. But it is a crucial one to understand. Your financial planning analysis must keep pandemic inflation top of mind, and consider how the Great Resignation contributes.
While a tight labor market may benefit those looking for new jobs, it is not always an investor’s friend. As businesses across the board raise wages, they also inadvertently raise inflation expectation. After all, the cost of rising wages naturally increases the cost of doing business. This increased cost trickles down further to goods and services.
Inflation can impact retirement savings, along with certain investments. Remember, you’re not ‘losing money’ because of inflation. In fact, many banks pay higher interest rates when inflation is high. What you are losing is spending power, as the cost of goods and services lessens the value of your savings account.
Investment-wise, bonds and certificates of deposit (CDs) are more susceptible to inflation, since they operate on set annual returns. A $1,000 bond may not retain the same spending power upon maturity, since it is not indexed to inflation. Especially in inflationary periods, it is important to understand the difference between nominal and real returns from these investment types. For example: at the end of 2021, the 10-year Treasury yield sat at 1.51%. But core inflation was 4.96%, meaning your real return would have been -3.45%. Your account might have looked like it was growing—but your buying power dropped.
Accordingly, conservative investors may need to consider steering away from bonds and move money into riskier markets. Consult with your wealth advisor to determine a new threshold for risk and assess whether your current portfolio could be outperforming current inflation rates. This is especially important for those approaching retirement and looking to maximize their portfolio’s value without risking their savings. Lower interest rates and rising inflation may prompt the reallocation of bond investments.
On a positive note, some sectors still perform well in high-inflationary periods, making for safer investments when the bond market won’t meet your financial goals. In fact, research suggests that many stocks within the S&P 500 index actually improve when talk of inflation is higher. Among the top-performing sectors are energy, financials, and materials. Keep an eye on these relationships, and note how the Federal Reserve continues to respond to inflation.
Secure Your Future—Talk to a Financial Advisor Today
The Great Resignation will continue to reshape the economy in profound ways, and your investments along with it. In such an uncertain period, hiring a wealth manager or financial advisor to oversee your investment strategies is critical. Financial planning and analysis during the Great Resignation can get complex, especially regarding labor shortages and vulnerable stocks. If you’re concerned about what impacts the Great Resignation may have on your portfolio, contact the experts at Polaris Wealth Advisory Group today.
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