By Trent Derrick, CMT
As the effects of the pandemic continue to be felt around the world, there is a lot of talk about the state of the economy and what it says about our financial future. As a financial advisor and portfolio manager, I focus on the performance of the markets, not necessarily the performance of the economy. They don’t always move in tandem; in fact, there is evidence to suggest that they are hardly correlated at all. (1) Since the value of my clients’ portfolios depend on the performance of the markets, that is where I point most of my attention.
Inflation Worries Are Overblown
Yes, it’s true that inflation is typically considered bad for the markets because it increases costs and decreases earnings projections. However, investors have a way of pricing this in by adjusting expected returns against expected inflation. (2)
The fears come in when inflation increases beyond what was originally expected, causing investors to demand higher and higher returns as a way to account for the increased risk. This is what we’re currently seeing, as inflation has skyrocketed beyond many economists’ expectations. (3)
But it’s much too early to panic! So far, this has only been a short-term increase in a rather extraordinary situation. Considering the boom in summer spending due to stimulus checks and relaxed COVID restrictions, combined with global supply chain issues, it makes sense that inflation is higher right now. The increased spending will inevitably subside and supply will eventually catch up with demand, allowing the inflation rate to stabilize. Not to mention, inflation is also part of the normal economic cycle and its rising rate indicates that the overall economy is in a state of recovery. (4)
Slow and Steady Recovery
Although the recovery may be slow, it is steady. Even with the concern surrounding the Delta variant, both the markets and the overall economy will likely be able to endure some volatility as the public has generally adjusted to the new social and investing norms caused by the pandemic.
A good example of this is the restaurant industry, which is still fairly healthy and strong. (5) As one of the industries that was hardest hit by the economic shutdown, the fact that it is still trending in an upward direction indicates that people are feeling more comfortable spending instead of saving, even in the face of COVID-19 variants.
Not Out of the Woods Yet
While the markets have shown definite signs of recovery, we are not entirely out of the woods yet. As of March 2021, the stock market was up 79% from crash last year, (6) but downside risk can never truly go away. There are always reasons to keep an eye on the markets. Just take a look at the charts below.
- Chart 1: This chart shows the price of lumber over the last 8 months, which is now crashing after its monumental run-up in May. Is this because of the lack of demand due to outrageous housing prices? Or is it an indication that lumber production is finally catching up with demand? Either way, this is definitely something I’m tracking as we move into the second half of 2021.
- Chart 2: This shows the yield on a 30-year bond. The steady decrease indicates that investors are buying bonds at a rapid rate. This could mean one of two things: either investors are seeking safer assets due to a slowdown in economic growth, or they are anticipating a lower rate of inflation than previously expected and hoping to make a profit on bonds. This is another trend I will be following in the coming months, but my sense is that the current levels of inflation are only temporary.
Schedule a Consultation Today
The past 18 months have been a trying time for everyone. As the markets continue to recover, reviewing your portfolio within the context of the larger economic environment can be a good way to reduce uncertainty and plan for your financial future. Legacy Wealth Management can help guide you through the ups and downs of the market to ensure that you are making informed decisions. Book a consultation here or email me at email@example.com to get started today.
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning, cash flow management, retirement planning, and bookkeeping. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT). Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.