The good news is that over the past 12 months, the market is up about 34%, as measured by the S&P 500 Index. Furthermore, in August 2020, the market was just shy of pre-pandemic levels, making the 34% rally even more exciting for investors. The bad news is that inflation is clocking in at 5.4% month over month, as measured by the Consumer Price Index. Producer prices increased 7.4% in June, which likely means we’ll continue to see consumer prices increase as the cost increases are passed on to the consumers.
Inflation happens when too much money is chasing too few goods. While some consumers are flush with cash from government stimulus, federal unemployment, rent relief, and eviction moratoriums, 60% of Americans saved their stimulus payments or applied it to their debt, according to the National Bureau of Economic Research. The majority of those who spent their stimulus ended up buying groceries and paying rent or bills. Bankrate reports that just 13% of stimulus recipients spent their money on discretionary activities and nonessential items.
So, what is causing this rampant inflation? In short, it can be traced to labor shortages, supply-chain disruptions, and past increases in energy prices.
Although we’ve seen the federal unemployment rate improve to 5.9% in June 2021 from the devastating 14.8% we experienced in April 2020, the problem is the labor force participation rate has only recovered half of what it lost during the pandemic. Americans are not seeking work. The Labor Department reports more than 10 million job openings—more than a million more jobs available than people searching for them. Unfortunately, this is hitting small businesses the hardest. According to the 3Q 2021 CNBC | Momentive Small Business Survey, 50% of small business owners report it is harder now to find qualified employees than a year ago, and 41% are experiencing a rising cost in wages because of the shortage. On top of their increase in wages, 86% of those are also reporting rising supply costs.
Since small businesses make up 50% of our country’s gross domestic product, the perception that the economy is struggling is easy to see. However, when you look at the S&P 500 earnings, 99% have reported second-quarter earnings growth, and 27.5% have reported sales growth. Therefore, we believe the stock market is one of the best hedges against inflation for investors. Corporations have an easier time passing on rising input costs to consumers.
Consider the most common investment alternative: Bonds are netting negative returns after inflation. The most likely scenario includes interest rates increasing in the next few months. Knowing that, it is also likely bond prices will fall leaving you with few attractive options outside of stocks. While you might not expect much out of your bond portfolio, it is still a great place to avoid potential volatility in stock prices if you need to keep assets sheltered for planned spending within the next 10 years.
While the economy might feel stressed, if you are invested according to your financial plan, you should be in good shape to weather this bout of inflation. If you have questions about your financial plan, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
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