Please note: This update was prepared on Friday, May 14, 2021, before the market’s close.
May flowers unfurling ushered in good news from the Centers for Disease Control and Prevention—fully vaccinated people can turn their unmasked faces to the sun again. While the idea of breathing freely might trigger a sigh of relief, market-watchers had reason to feel queasy earlier this week as traders’ fears of higher inflation were reflected by sinking stock prices.
The spike in consumer prices, which rose in March at their fastest pace in nearly nine years, wasn’t the only thing that spooked the markets: Gas prices also surged on the back of an exogenous event—the hacking and shutdown of a massive pipeline running from Texas to northern New Jersey.
The eye-popping pick-up in prices at gas stations and grocery stores, while jarring, is most likely transitory—driven by passing factors related to the pandemic.
Speaking of temporary: Wednesday’s 681-point (or 2.0%) dip in the Dow was followed by a 433-point (1.3%) rise on Thursday, and markets are rallying again on Friday as we write this update. On a total return basis, the Dow Jones Industrial Average is up 11.9% year-to-date through Thursday, while the broader S&P 500 has gained 10.1%. The MSCI EAFE index, a measure of developed international stock markets, has returned 6.1%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.56%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.9% this year.
Inflation Duration Explained
The current wave of inflation is likely to be short-lived, as mentioned above. Data points to it being the result of an economy rapidly revving up after last year’s pandemic pullback and not a structural issue that acts as a long-term spoiler dragging on our economy for years to come. We’ll explain.
Reason one is something called base effect, which is when a measure seems to surge because the year-ago number (the denominator in the fraction) is abnormally low. Prices today seem high because they are compared to the plunging prices from April 2020, when much of the country locked down. Now that we are reopening, prices are returning to normal levels; inflation numbers are high due to last year’s low prices.
Factor two is the current mismatch between supply and demand. With COVID-19 restrictions easing, people are planning summer barbecues, buying cars and making travel plans. Companies that pulled back on inventory are now scrambling to restock to satisfy the recently reenergized consumer. In some cases, manufacturers are double- and triple-ordering just to catch up. But what happens when that over-ordering slows? Prices fall again.
And while consumers are ready to spend right now, much of the cash in their pockets has been put there via government stimulus. This chart compares U.S. consumers’ personal incomes over the course of the pandemic both with and without government stimulus payments:
Pockets and purses have been boosted by government largesse—without the stimulus, overall household income is flat. Absent longer-lasting wage increases, we would expect the effects of stimulus to fade over time.
Shortages in the Driver’s Seat
A look under the hood of the car market shows it to be an excellent exemplar of broader recovery themes and inflationary trends.
As businesses reopen and commuting resumes, and with more people relocating to the suburbs and avoiding crowded public transportation, the need for vehicles may be higher now than pre-pandemic. Meanwhile, pandemic-sparked supply chain snafus—including shortages of semiconductors essential for modern vehicles—have led to a lack of new auto inventory. With high demand and fewer cars, the average price for a new car has zoomed past $40,000 in 2021. Meanwhile, rental companies, which emptied their lots to save cash during the pandemic, have proven unable to keep up with newly resurgent demand from travelers, making reservations scarce (and expensive) heading into the summer vacation season.
The fact that rising car prices don’t appear to be slowing consumption is a good sign for the economy. Too many dollars chasing too few goods is both a sign of recovery and an inflationary sign that ought to be temporary.
China: Outsized Investment Opportunity or Runaway Risk?
This week’s reader question is about investing in China: What is your outlook on China and is this an area of opportunity for equity investors? What are the risks and how are you factoring China’s evolving regulatory and control policies (toward its companies) into your outlook?
An astute question, thoughtfully worded. China has been on our investment radar for years, and increasingly so as its economy has grown to become the world’s second-largest, its markets have become more open and its regulations, and regulators have become more transparent and accountable to the global marketplace.
Overall, given China’s outsized population and its transition from an agrarian to an industrial economy, as well as its evolution toward a consumer-driven society, we think the investment opportunities (companies doing business with China and Chinese companies doing business beyond its borders) are vast.
But this is China we’re talking about—we know that such outsized opportunities come with outsized risks, including China’s leaders imposing restrictions on some of its most innovative companies and “reeducating” its entrepreneurs. Both actions are more than warning shots—they’ve had material impact on such companies’ prices and an existential toll on their business leaders.
Our current direct exposure to China, then, is so small as to be nearly de minimis, but every investors’ indirect exposure to China continues to scale up—it is difficult to conceive of anything from an electric toothbrush to a car to a supercomputer that isn’t impacted by China’s interests, economic activity and reach.
So, we look at data, read reports, listen to fund managers and converse with each other about China as often as we discuss any major macro theme. We’re looking at what each reversion to their prior hardline version of communism means to investments there, here and elsewhere. We’re cognizant that the harder a line China takes, the greater the backlashes against its government could be (most likely first manifested in trade relations).
Shutting down, rather than keeping open, lines of communication between the world’s two super-economies and superpowers, would be dicey, as would be China reversing course on its free-market progress. But rest assured that we won’t just hope the old diplomatic line holds true; so long as we’re talking, we’re not fighting. We’ll stay informed about what’s going on inside the world’s second-largest economy as it relates to our own, and what’s transpiring regarding the world’s second superpower.
My apologies for an ambiguous response, but there’s unlikely to ever be a simple, clear answer to your excellent China question. Most importantly, from our investment perspective, we have the highest conviction in our ability to access opportunities in any marketplace we want to explore or remain in. And we may want to do both, with regard to China, over the span of the next decade or two.
Financial Planning Focus
Planning in Your 60s: 5 Things to Do Before You Retire
According to a recent survey, 46% of American households are at risk of not being able to cover essential expenses in retirement. We don’t want yours to be part of that statistic. Retiring is a major milestone, and it requires not only financial preparedness but emotional readiness.
To make sure you are prepared to meet this goal, check out our five steps below:
Understand Your Social Security Benefits: Social Security is the number one topic pre-retirees ask our financial planners about. An essential first step to becoming fully informed is creating an account at ssa.gov to get an estimate of what your Social Security benefits will look like. Exactly when you choose to begin taking Social Security will impact your income throughout your retirement—retire early and you’ll face penalties that could cost you thousands; delay a little longer than the standard retirement age and you can reap substantial benefits. Before you start taking your benefits, talk to your adviser about how to strategically maximize Social Security as part of your retirement income.
Top Up Your Emergency Fund: It’s always wise to hold three to six months’ worth of expenses in a cash account to meet unexpected needs, but it’s especially important as you prepare to retire. Yes, you’ll have your asset base to draw on to meet those expenses. But, ideally, you’ll want to keep that money invested for as long as possible, accumulating compound interest, to help carry you through potentially 25 or 30 years in retirement.
Revisit Your Financial Plan: A well-built financial plan can provide a roadmap to retirement, but it’s important to course-correct as the day draws near. As you make firm decisions on where and when to retire, it’s worthwhile to review your spending needs, estimate your taxes (especially if moving to a new state or selling your home) and consolidate accounts to get the clearest possible picture of your retirement income. It’s also a good idea to review your investment portfolio and make sure it’s allocated to preserve your assets as you transition into retirement. Reviewing your plan with your adviser will provide peace of mind and allow you to make the adjustments you need to retire according to plan.
Account for Your Free Time: Many people look forward to having more leisure time in retirement. Far fewer have a plan for what they’ll do with it. The average retiree watches around 40 hours of television per week—for most of us, an enjoyable retirement will require a bit more than adding Disney+ to complement our Netflix subscription. Whether you’re interested in using your professional expertiseto be a consultant or devoting more time and money to causes you care about, thinking through the costs and benefits of your new lifestyle is an important part of your retirement plan, both for your bottom line and your peace of mind. Don’t let this be an afterthought.
Strategy Activity Update
Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.
No trades this week.
AIQ Tactical Global Growth
Sold Fidelity MSCI Real Estate Index ETF (FREL). Bought Fidelity MSCI Financials Index ETF (FNCL).
AIQ Tactical Defensive Growth
Sold iShares CoreS&P 500 ETF (IVV), with proceeds to cash.
AIQ Tactical Multi-Asset Income
Sold Vanguard Short-Term Inflation Protected Securities ETF (VTIP). Bought iShares TIPS Bond ETF (TIP).
Next week, we’ll get insight into what Federal Reserve Chair Jerome Powell and his colleagues were discussing at the previous FOMC meeting when the minutes are released. We’ll also get manufacturing and service sector activity reads and housing-related data (homebuilders’ confidence, permits, starts and existing home sales).
As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, May 14, 2021, before the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
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