We hope you are all enjoying your summer! It is another hot one in Southern California, almost as hot as the real estate market. I know the Vance Wealth team has been trying to beat the heat by heading to the beach or spending time in the pool this summer. However you are trying to beat the heat, we hope you are getting some sort of relief.
What if I told you the S&P 500 is up almost 90% over the last 16 months? The market bottomed in March, 2020 and is up almost 90% through July 20th. There has been very minimal volatility along the way, a few 5%-6% pullbacks, but nothing major. We have been having conversations with clients this year about taking profits, paying some capital gains tax (if applicable), and making sure their accounts are in line with their target allocation. We much rather rebalance “on our terms” versus having to raise cash for a client in a market downturn because we didn’t plan properly.
Year-to-date, the S&P 500 is +16.12% (as of July 19th). The gap has narrowed between Value stocks vs. Growth stocks (+16.15% vs. +14.42% respectively) as a whole, but the difference between small value vs. small growth is much more apparent (+19.4% vs. +1.10%). We think it makes sense to maintain a diversified approach to investing because we are seeing these major shifts in sector or style performance. We believe the markets are still poised for growth over the long-term, but do not rule out the possibility of some near-term volatility. As the Delta variant becomes more widespread across the globe, and additional precautions are taken to limit the infection rates, we could see investors taking a pause to gain some clarity on what happens next. Volatility is normal, and mostly healthy for the markets especially when it has been almost non-existent since March, 2020. We will continue to focus on what we can control and make sure our client portfolios match their financial plan and plan for that next “unexpected” event. It is not a matter of IF, but WHEN as the recent events have shown us.
Update on Inflation Concerns –
Scott J. Brown, PhD and Chief Economist at Raymond James, recently published a Q&A1 regarding Inflation from questions he has been receiving from advisors and clients alike. We have been receiving similar questions which is why we wanted to share his Q&A on such a timely topic:
Q: Why does the Fed say there’s no inflation when the price of everything I buy is going up?
A: Fed officials are not disputing the fact that inflation has picked up, but it is important to remember that your personal rate of inflation may differ from what the Fed targets when setting monetary policy. The Fed is concerned about sustained increases or decreases in the overall level of prices in the economy. It is not focused on the price of a single good or service. Consumers tend to notice price increases right away, particularly for food and gasoline prices, but they don’t often see places where inflation is low or negative (bought a large-screen TV lately?). Prices of most goods and services are raised periodically – so you see the increase all at once rather than over time. The media can also play a big part in fanning inflation fears- just look at the nightly news lately.
While consumer price inflation is now above the 2% target on a year-over-year basis (5.0% for the 12 months ending in May 2021), the Fed believes that the increase is due to transitory factors. One of which is called ‘base effects’ — inflation was low during last year’s lockdowns (the CPI rose just 0.1% for the 12 months ending May 2020) and prices are rebounding as the economy returns to normal. Another transitory factor is restart pressures, such as supply chain disruptions and materials shortages. Restart pressures occur in every economic recovery, but are more intense now due to the speed of the economic recovery. Fiscal policy has been larger than was anticipated at the start of the year and vaccinations have arrived quicker. The surge in economic growth caught some producers flat-footed. February’s severe weather delayed supplier deliveries and the pandemic has had a continued impact on foreign trade, made worse by container shortages and higher shipping costs.
Q: How long is transitory?
A: There is no precise time period, but most inflation pressures should not be permanent. Base effects will continue for a few months, fading by late summer. Supply chain bottlenecks and input shortages may not be resolved as quickly and could put upward pressure on inflation beyond this year, but they will clear up eventually.
Labor market frictions will be more intense than in a typical economic recovery. Matching millions of unemployed workers to available jobs will be challenging. Schools and daycare facilities will reopen in the fall, which should lead to an increase in labor force participation; however, many older workers opted for early retirement during the pandemic and may be reluctant to re-enter the labor force.
Fiscal policy will remain supportive into 2021, but less so, becoming a drag on economic growth (offset partly by a recovery in private-sector demand). The increase in household savings, built up during the pandemic, should support consumer spending growth in the near term, but will be depleted over time. Economic growth is expected to moderate into next year, helping to reduce inflation pressures.
Q: Why are some economists (including former Treasury Secretary Larry Summers) more concerned about inflation than others?
A: Economists (including those at the Federal Reserve) believe that inflation expectations play a key role in the inflation process. As inflation expectation rise, workers are more likely to demand higher wages and businesses are more likely to try to raise prices, thus higher inflation expectations can often be self-fulfilling.
Market-based measures of inflation expectations, such as ‘breakeven inflation’ (the spread between inflation-adjusted Treasuries and their fixed-rate counterparts) have crept higher. Survey-based consumer expectations of inflation have also risen. The key question is whether inflation expectations rise further and whether that increase will be sustained. Recently, measures of inflation expectations have begun to moderate.
Some economists, including former Treasury Secretary Larry Summers, are concerned that the unprecedented amount of fiscal stimulus will boost aggregate demand enough so that it continues to outpace supply. Under this scenario, inflation pressures won’t recede, leading to a sustained increase in inflation expectations (and higher actual inflation). Biden administration economists (and others) disagree — believing that supply chain issues will be resolved and inflation expectations will remain well-anchored.
Q: Why does the Fed exclude food and energy? Don’t you and I have to buy gasoline and groceries?
A: The Fed does consider food and energy prices in its inflation outlook; however, since food and energy prices tend to be volatile, economists focus on the core measure to get a better sense of the underlying trend in inflation. There are a variety of other ways to measure core inflation, such as excluding the large price increases and the large price declines each month or by simply looking at the median price increase; however, excluding food and energy prices is the most common.
Q: What if the Fed is wrong and inflation does rise on a sustained basis?
A: If higher inflation is sustained, the Fed can always tighten policy through a reduction in the monthly pace of asset purchases or by raising short-term interest rates sooner than expected. Under this scenario, economic growth would slow, perhaps more than intended. Soft landings are difficult.
In a recent speech, Fed Governor Lael Brainard said “a persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace.” The Fed will be closely monitoring the incoming data, “attentive to the risk that what seem like transitory inflationary pressures could prove persistent.” However, Brainard stressed that “should this risk manifest, we have the tools and the experience to gently guide inflation back to our target — no one should doubt our commitment to do so.”
In the 1960s, Milton Bradley introduced battery-powered Operation®, which tested kids’ ability to remove butterflies in the stomach and other ailments without setting off a buzzer. As the economy heals, the ‘money doctors’ at the Federal Reserve (Fed) will be delicately removing some of the ultra-accommodative monetary policy that nursed the economy back to full speed. The trick: remove pieces from the accommodative policy without being zapped by surging inflation or short-circuiting the economy. The Fed will need to keep a steady hand and be patient. If inflation proves transitory and peaks during the third quarter as we expect, the Fed will be able to taper its bond purchases by late this year into early next year and not raise rates until 20232.
If you would like to discuss your long-term financial plan in greater detail, please contact our office to schedule time with one of our Wealth Advisors. If you are not currently a client and value a second opinion, please contact our office at (888) 775-0950. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected.
Jerrod Ferguson & the Vance Wealth Investment Committee
- Investment Strategy Quarterly, Volume 13 Issue 3, July 2021 – Q&A: Inflation; Scott Brown, PhD, Chief Economist – Raymond James
2. Investment Strategy Quarterly, Volume 13 Issue 3, July 2021 – Investing is Not a Trivial Pursuit; Lawrence Adam, Chief Investment Officer – Raymond James
Disclosures: The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance does not guarantee future results.
The information provided is for educational and illustrative purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure.
2021 – Q3 Market Update