Management of Wealth Assets in a Portfolio

Management of Wealth Assets in a Portfolio Economic Indicators Review Gross Domestic Product Gross Domestic Product (GDP) is a measure of global or national economies. It measures the final goods and services purchased by the final user or produced in a country within a given time frame, either quarterly or annually. It also takes into account all outputs generated within the borders of a country. Apart from goods and services produced for the purpose of selling, GDP also accounts for nonmarket production, which includes educational services or defense, which are provided by the government. A growing GDP is an indication that a country has good financial health. This means that employment is stable. A low GDP is an indicator of economic decline, which also affects the employment level within a country. However, the GDP of a country might be growing but not at an expected level capable of creating the right number of jobs to sustain the citizens of a country. Data from the Federal Reserve Bank of St. Louis provides an overview of the GDP trend in the U.S over the years, providing a better understanding of the general economic performance in the U.S. Based on the Federal Reserve Bank of St. Louis, it is evident that the U.S has had a growing GDP since 2018, with Q1 indicating a GDP of $20,328.553 over the years, except for 2020, when there was a sharp decline because of the pandemic, which was the main cause of the fall in GDP. The financial year 2020 was burdened with a lot of challenges following the pandemic, which resulted in the closing of many businesses because of lockdown and many people losing their jobs. In Q1 of 2020, GDP increased slightly to $21,751.238, which continued to decline to $19,958.291 in Q2. In 2021, there was an economic improvement, with GDP at $22,680.693, which continued to rise steadily until 2026, with a GDP of $31,865.721. The economic improvement was a result of businesses reopening and increased economic activity, which created economic growth. This is an indication that the U.S economy is performing well over the years, as the economy has become more stable compared to the pandemic era. Unemployment Rate Data from the U.S Bureau of Labor Statistics shows that the unemployment rate in the U.S has been maintained at approximately 4% over the years. In 2018, the unemployment rate was at 4.0% in January, which declined slightly to 3.9% by December the same year. In 2020, the unemployment rate rose to 14.8%, which was a result of many jobs closing down during the pandemic and massive layoffs of employees because businesses were struggling to maintain their workers due to economic decline. After the pandemic, the unemployment rate began to decline steadily, down to 4.3% in 2026. Economic recovery after the pandemic, with businesses reopening and economic activity, had a positive impact on the unemployment rate. Unemployment Rate in the U.S Inflation Rate The inflation rate in the United States was relatively moderate from 2018 until the COVID-10 pandemic, but rose sharply after 2020. The overall price level has seen a significant increase as depicted in the Consumer Price Index (CPI). This growth was due to multiple factors such as supply-chain issues, more robust demand from consumers with the reopening of the economy, labor-market pressures, and rising prices of energy and commodities. This rise in prices put a lot of inflationary strain on the overall economy. Following the sharp rise in 2021 and 2022, inflationary pressures have now started to moderate while the overall price level has continued to increase. The Federal Reserve faced high inflation, so its response was to switch from an expansionary monetary policy to a contractionary policy and to raise interest rates to slow down demand and price growth. For alternative-energy investments, these developments could also impact the costs of projects as well as the returns on investments, as inflation and rising borrowing costs could drive up project costs. The graph below shows the inflation rate trend. Fiscal Policy Review During and after the pandemic, fiscal policy became crucial to implement. The Infrastructure Investment and Jobs Act (IIJA) of 2021 and the Inflation Reduction Act (IRA) are examples of federal investments aimed at addressing infrastructure, energy, transportation, and climate. These policies apply to various areas, such as transportation, manufacturing, electricity, construction, clean energy, and technology. These investments can boost the overall demand for goods and services, construction, business activity, or employment. The IIJA was a 1.2 trillion investment following its passage by the Senate in 2021. Funding allocation was based on different projects: roads and bridges being allocated $110 billion, $66 billion for rail projects, $42 billion for airports, ports, and waterways, $39 billion for public transit, $73 billion for the electric grid, $55billion for water infrastructure, $65 billion for broadband expansion, and $25 billion for airports. The majority of the funds were allocated to the transportation sector; it being planned for $637.8 billion with the guaranteed amount being $537.5 billion guaranteed. IIJA Funding Allocation 2021 The Inflation Reduction Act (IRA) The IRA was a $369 billion Act, passed under President Joe Biden’s presidency with the aim of reducing greenhouse gas emissions and controlling climate change (Rajagopalan & Landrigan, 2023). The potential benefit of the act is that it will help to address pollution challenges. The IRA offers clean electricity, clean vehicles, advanced energy projects, clean fuels, carbon capture, and energy-efficient buildings. Qualifying investments under these incentives may save money on projects and enhance the anticipated financial return. It can also provide incentives for private investors to get involved, as the financial risks involved with emerging technologies are minimized when there are government incentives to help. The Act also has a positive impact on the health sector as it addresses air-pollution-related diseases and premature death. These diseases include cardiovascular diseases, lung cancer, and diabetes. The Act provides $3 billion to fund community-led projects aimed at improving the quality of indoor air in low-income communities (Rajagopalan & Landrigan, 2023). Disadvantaged communities will also benefit from having technologies that reduce pollution around them. Keynesian-Based Infrastructure Investment Keynesian theory holds that infrastructure investment will increase aggregate demand and thus economic activity when the government invests more (Ahn & Juraev, 2023). Higher spending can lead to more jobs and earnings and, potentially, more spending and investment by businesses. It can open up opportunities for an alternative energy portfolio by driving up the demand for renewable energy generation, such as EVs, charging stations, energy storage, and related technologies. Expansion of the fiscal sector, however, can also help to create inflationary pressure when demand for the goods and services provided by the fiscal sector outstrips productive capacity. Thus, the investment opportunities to be obtained from fiscal policy have to be analyzed in relation to the possible increases in interest rates and input costs. Monetary Policy Review Federal Response, 2020 to Present In March 2020, in response to COVID-19, the Federal Reserve embarked on a policy of expansionary monetary policy to minimize the economic harm resulting from the pandemic. It reduced the federal funds rate to virtually zero, bought up Treasury and mortgage-backed securities, gave forward guidance, and created emergency lending programs to back economic activity and credit markets (Milstein & Wessel, 2024). Federal Reserve adopted contractionary monetary policy in early 2022 as the condition of the economy improved and inflation rose. It implemented rising interest rates and contracting asset purchases in order to fight rising demand and inflation that had not been seen in decades. Causes of Inflation and Higher Borrowing Costs Rising prices are a result of pandemic-related supply disruptions, new consumer demand, and supply chain bottlenecks (Agarwal & Kimball, 2022). Other factors include strong demand, rising commodity prices, supply constraints, and labor-market pressures (Bernanke & Blanchard, 2023). Inflationary pressures were further reinforced by fiscal support, which boosted demand, while supply continued to be limited. This meant interest rates had to be increased to decrease borrowing, spending, and investment, and to slow aggregate demand, thereby helping to deflate the economy (Attinasi & Di Casola, 2024). Alternative Energy Investment Effects The higher the cost of borrowing, the more expensive the financing will be for capital-intensive alternativeenergy projects. There may also be higher rates of return for which investors must be willing to pay due to greater opportunity costs and financing costs. This can make projects that rely on borrowing less appealing. With a favorable balance of incentives, however, some of the costs of those projects can be covered, making them appealing even with the tight monetary policy. Macroeconomic Prediction The economic overview is suggesting one of moderate growth, nowhere near a recession or a return to the very strong growth seen in the early post-pandemic recovery. The Congressional Budget Office (CBO) forecast economic growth to slow to around 1.8 percent in the longer CBO forecast period of 2024-2043 and inflation to return to around 2 percent (CBO, 2024). Overall, the CBO expected unemployment to be in the 4.3 to 4.5 percent range in the years that followed. Taking these trends into account, GDP will probably continue to rise during the next 2-3 years at a moderate pace. Inflation is also expected to continue on a path toward the Fed’s longer-run inflation goal, but could stay above 2 percent for a while. There should be a relatively stable level of unemployment, but the unemployment rate might slightly increase if the demand for labour decreases with the slowdown in GDP growth. It is an environment that poses opportunity and risk with regard to alternative energy. Electricity demand should continue to grow with the economic expansion, and project economics could be enhanced with the federal clean energy incentives. But the returns on highly leveraged projects may be restricted because of the high financing costs. Thus, portfolio managers should focus on alternative investments with good cash flow, a reasonable amount of debt, proven technology, and large federal incentives. References