In today’s Steady Investor, we take a look at key factors that we believe are currently impacting the market, such as:
Inflation Remains Elevated in July, But Pace Slows – Inflation may be the most closely-watched economic metric in 2021, and the July reading was released this week. Consumer prices (CPI) rose 5.4% in July 2021 from July 2020, which marked the highest 12-month jump since 2008. The base effect – which takes into account inflation conditions during summer 2020 when a patchwork of restrictions was still in place – remains a factor, but its impact is fading. As we move into the fall and winter months, the base effect will no longer be a good reason for explaining high year-over-year inflation readings. July’s CPI did have one minor silver lining – the pace of monthly inflation increases was 0.5% from June to July, which marked a material slowdown from the 0.9% increase from May to June. Even still, the average pace of increase was 0.2% from 2000 to 2019, so inflation is currently moving twice as fast in the current year as compared to previous decades.1
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What’s Driving Inflation in the U.S.? One of the big factors that drove the slight slowdown in inflation from June to July (as compared to May to June) was used-car prices. The semiconductor shortages and supply chain bottlenecks have crimped the production of new cars, which drove many consumers into used-car lots and bid up prices significantly in the process. As shortages ease and supply chains resolve issues, price pressures in the automobile space may ease, contributing to the “transitory” inflation argument. Indeed, rising prices over the past quarter have largely been attributed to disrupted supply chains, a surge in demand in travel, hospitality, and eating out, combined with labor and input shortages across the board. While those pressures ease in the coming months, they could be offset by rising rents and continued rising home prices, while wages also get pressured higher. In our view, these counterbalancing forces in pricing may ultimately lead inflation to somewhere in the middle – not transitory but also not run away as some believe.3
More Jobs Than Unemployed Americans? The number of open jobs in the U.S. economy pushed to a new record high in June and now outnumbers the unemployed. Unfilled job openings increase by 590,000 in June to reach a total of 10.1 million, which is the highest level since the Labor Department started keeping records in 2000. Compare the 10.1 million open jobs in the U.S. to the 8.7 million Americans who lack jobs, and one can see the glaring disconnect that underscores the strength of the labor market. There are several economic explanations for the disconnect, from expanded unemployment benefits to child care needs to low wages. But there is also a mismatch between where people want to work and the industries that are currently hiring. Namely, service-sector jobs in leisure and hospitality have struggled to fill positions.4
Gold Still Isn’t an Effective Inflation Hedge – It’s been 50 years since President Nixon ended the ability to convert gold into the U.S. dollar at a fixed rate. Since then, gold has etched its way into investor’s minds as the best possible inflation hedge available. But is it? Not if you look closely at the data. Sure, the price of gold is 50 times higher than it was in 1971, and inflation has risen by a lesser amount. But in order to be a consistent and reliable hedge against inflation, gold should maintain a relatively stable ratio to the consumer-price index. It hasn’t. According to data crunched over the past 50 years, the ratio of gold prices to CPI has fluctuated from a low of 1.0 to a high of 8.4, making gold far more volatile than consistent. Gold fluctuates relative to inflation as much or more than other asset classes, like stocks. Speaking of which, when comparing the performance of gold to stocks over the last 50 years, stocks have done better – the S&P 500 has generated an annualized return of 11.2% compared to 8.2% for gold.
Inflation is likely to continue to be a closely watched metric for the remainder of 2021, so what can investors nearing retirement do to protect their assets? You can create a retirement portfolio that meets your financial goals. To help you do this, I recommend reading our guide, 7 Secrets to Building the Ultimate DIY Retirement Portfolio.6 It provides a step-by-step blueprint of our customized investing process to potentially help you build a sound retirement portfolio of your own and pursue long-term investing success.
If you have $500,000 or more to invest, get this guide to learn our ideas on the step-by-step process to building and maintaining a retirement portfolio that will potentially help you reach your goals and enjoy a secure retirement.
Disclosure