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Debate Over Rising Inflation -May Market Update

Debate Over Rising Inflation -May Market Update

May 26, 2021
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Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

At-A-Glance

5 min read

  • Recent economic reports continue to show a recovery that is gaining strength ahead of expectations.
  • The April jobs report was largely disappointing with only 266,000 jobs created, against expectations of nearly 1M jobs. The unemployment rate rose to 6.1%, as employers are having a hard time enticing workers back to the workplace against enhanced unemployment benefits.
  • Significant supply chain constraints and disruptions are causing major delays and creating rising prices in many items that US consumers buy regularly.
  • The debate over rising inflation is intensifying among economists and market strategists. The majority believe that we are entering a new inflation regime that could last three to four years. However, a smaller, but very vocal and intelligent group, agrees with the Federal Reserve Bank that inflation will be short lived and transitory.
  • The committee believes that maintaining your appropriate age and risk-based asset allocation, along with regular rebalancing, to be the most prudent course of action. As markets achieve new highs, this should be viewed as an opportunity to create liquidity for any short to intermediate term cash needs

The Horizon Advisor Network Investment Committee met on the afternoon of May 17th, 2021. All five members of the team were present and had an opportunity to share updates and insights on what was going on with our model portfolios, as well as the economic and investment outlooks of the various strategists and economic teams that we follow. 

 

A Strengthening Economy

We are happy to report, that the model portfolios tracked and managed by the committee members continue to perform in line or above their risk-adjusted index-based benchmarks, over the most recent one, three and five years. 

Recent economic reports continue to show a strengthening economy. The combination of continued re-openings, the successful roll-out of the vaccines, along with the Federal Reserve maintaining low interest rates, and additional stimulus from Capitol Hill is causing economic activity to grow at a pace we have not seen in nearly 40 years. 

 

Rising Prices

Unfortunately, there are a number of employment and supply chain constraints and disruptions that are causing upward pressure on inflation. The April jobs report was largely disappointing. There were only 266,000 new jobs created. This is against a backdrop of nearly 1M jobs expected. The unemployment rate unexpectedly rose to 6.1% instead of dropping to 5.8%, as forecast. This is largely due to the fact that employers are having a hard time enticing workers back to their jobs. This comes from a combination of enhanced unemployment benefits and residual fears around the COVID-19 coronavirus. The most recent JOLTS report from the U.S. Bureau of Labor Statistics showed that there are a record number of more than 8M jobs available and unfilled in the US currently. 

In addition to this, supply chain disruptions are causing prices on most goods, and some services to rise, more quickly than we have seen in many years. The 0.8% increase in CPI on a month over month basis was the fastest rate of growth since 1981. 

There is substantial debate among economists about the outlook of inflation.  The majority believe that we are entering a new era where inflation could be elevated at 3%-4% or more for several years or more.  This seems to be the consensus view at the present time.  While nobody is talking about the late 70’s style hyperinflation, we have not had inflation at this level in many years.  

However, there is a smaller but very vocal and very well experienced group that agrees with The Federal Reserve Bank. They believe that inflation will be short lived and transitory due to the one-time effects of economic stimulus wearing off, aging demographics globally, lower birth rates, and the continued disinflationary impact of technology over time.  While nobody knows who will be right, we will continue to watch this, and will be able to make adjustments if and when necessary.

 

Final Takeaway

The committee believes that maintaining your age and risk based appropriate asset allocation is important. It is important to rebalance your portfolio on a regular basis to make certain that your risk does not get out of line.  We also believe that as markets hit new all-time highs, you should look at this as an opportunity to create cash for any of your short term to intermediate needs.  We believe that the political and economic backdrop and uncertainty will continue to lead the bouts of volatility. 

It is very important in times like this, where we are seeing economic growth and inflation at levels we have not seen in 30 or 40 years, to have a strong economic, investment and historical context to make wise decisions.  The committee takes this responsibility seriously and will strive to be well informed. Our aim is to help you build and protect your assets in a prudent manner. Should you have any questions regarding these notes, please do not hesitate to reach out to your advisor.  Thanks, and have a great day.  

Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

 

*Past performance does not guarantee future results.

*Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

*Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No System or financial planning strategy can guarantee future results.

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Members of the Investment Committee

  • Jesse Hurst- Impel Wealth Management
  • Clint Gautreau- Horizon Financial Group
  • Kevin Myers- ATL Global Advisors
  • Brian Toma- Freeman Heyne Toma Financial Advisors
  • Joy Schlie- Freeman Heyne Toma Financial Advisors