There seems to be a debate regarding inflation at-the-moment. Investors with optimism believe the Fed’s assessment of current inflation concerns is transitory while those that are pessimistic believe inflation will run rampant. The stock market is fighting a war between these two views. The pessimistic group is the “fearful” group, and they are concerned that inflation will increase and cause lowering of stock market earnings therefore, lower stock market returns. Meanwhile, the optimists discount this view of lower earnings reducing stock values.
We choose to place confidence on the Fed’s assessment that inflation is transitory based on its inflation analysis. They calculate the current spike should be short-lived – maybe by year-end based on the rolling 12-month median consumer price index (CPI) data. It provides a year-over-year average which was down in April 2021 of 2.4% over last October’s peak of 3.0%. This suggests higher short-term inflation this summer and maybe through the winter due to:
- Massive fiscal stimulus; more than $5.3 trillion pumped into the economy in the last year and half.
- Extraordinarily monetary easing by the Fed; buying government bonds keep interest rates low. And
- Pfizer plus Moderna pharmaceuticals with their new vaccines which are helping us return to “normal.”
We believe these three factors offer the best path to a post pandemic economic recovery and growth in which we should lead the rest of the world. Economic news reported on TV business news suggests the result could be gross domestic products (GDP) growth of 5.5% to 6.5% range this year. Yes, this growth results in price increases i.e., inflation due to demand pressures to labor supply shortages and manufacturing bottlenecks.
Therefore, it is our view, these factors should result in elevated CPI readings through summer and possibly through year-end that should give rise to expected market volatility and investor apprehension; not to mention, concern of higher taxes especially for couples with income more than $400,000.
Market comments are based on various indexes which are unmanaged and cannot be directly invested into. Past performance is no guarantee of future results. Investing involves risk and the potential to lose principal. The information provided is for general informational and educational purposes only and is not a recommendation of any kind or investment advice. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and cannot be guaranteed. (06/21)