What’s the good news? As I sit down to write this, nearly every major equity index is up double digits on the year and the S&P 500 has nearly doubled from the March 2020 lows. Looking back at our past writings, we did predict that there would be a swift recovery, however I must admit, I never saw it happening this rapidly. By almost every economic measure the white house and federal reserve get an A+ for their economic response to the pandemic. Many businesses were able to ride out the brunt of the pandemic with the help from PPP loans, individuals who were let go from their jobs were able to receive additional unemployment benefits, and the option to work virtually has become the world’s new norm. With so much loss and hardship we are lucky enough to be able to find a number of positives.
Now as we creep back towards normality, some of those same policies that kept our economy and businesses alive, could very well be doing just the opposite and having a negative impact on our long-term economic outlook. Below I will touch on the three major issues, as well as go over what we are keeping our eye on from a market perspective going forward.
First, inflation… everyone is talking about the economy overheating, wages increasing, and the adverse effects that could derive from the federal reserve continuing to buy 120 Billion of assets a month. These are all possibilities; however, we are in the camp that inflation will continue to run hot into the end of the year until early 2022 where it begins to recede back to the Feds target of 2%.
Second, labor and supply shortages. I’m sure everyone has seen this in their everyday lives… Whether it’s help wanted signs in the windows of most small businesses, or a restaurant that is half empty but has no reservations available. Everyday commodities on back order, no cars for sale due to a global chip shortage, or Starbucks not being able to serve their oatmeal because they can’t buy the paper cups it’s served in. In the short run, these imbalances are here to stay… Hopefully once boosted unemployment benefits expire in the fall there will be a hiring frenzy that will allow retailers to keep pace with demand. Until then… there is no incentive for those receiving increased unemployment wages to reenter the labor force and the service sector will continue to be off balance. As for supply chain shortages, these could prolong longer than employment as global companies continue to grapple with the prolonged effects of COVID 19.
Third, and what we are watching most diligently is the 10-year treasury. The 10-year treasury is possibly the most widely used economic indicator. I tend to look at it as a tell-tale sign for future growth and investor confidence. With the US economy getting back to normality and unemployment closing in on pre pandemic levels, you’d think that the 10-year treasury would begin to rise as an indication that our economy is growing. Unfortunately, just the opposite is occurring. As I write this the 10-year treasury sits at 1.13%, and Ed and I are in the camp that this is signaling something down the pike… What it is, we aren’t entirely certain, it could range from increased COVID restrictions, weakening supply chains, tax increases, ballooning government debt, etc…
It is by no means a certainty and we aren’t advocating for everyone to sell out and go to cash, however we are advocating for caution and rebalancing back to your own individual asset allocation. In our experience the time to rebalance and reassess risk tolerance is when markets and portfolios are at their peaks. As always don’t hesitate to reach out if you’d like to discuss your own personal situation.