The recent passage of the $1.9 trillion American Rescue Plan
– and the trillions of dollars in stimulus that came before it – have revived
inflation fears. Many readers remember the period of double-digit inflation in
the 1970s and early 1980s, which culminated in a major, global economic
recession. With all the current spending, some fear history is bound to repeat
itself.1
Early inflationary signs are appearing. One of the best
places to look for future inflation is in the cost of risk-free debt, i.e., long-dated
U.S. Treasury bonds. If the market expects higher future inflation, it will
demand a higher yield on risk-free bonds today to compensate. That’s why in the
late 1970s and early 1980s, investors could buy U.S. Treasury bonds yielding
double-digit interest rates.
In times like this when market volatility is a constant and
inflation is becoming a huge concern for investors, it is important not to lose
sight of the long-term view. Don’t let the media and sudden changes in the
market cause you to make knee-jerk responses based on emotion.
The best way to navigate through inflation is to focus on
the fundamentals, hard data, progress and innovation being made. To help you do
this, I am offering all readers our just-released Stock Market Outlook report.
This report contains some of our key forecasts to consider such as:
S&P
500 earnings growth
Outlook
for underlying U.S. economy?
U.S.
returns expectations for 2021
What
produces 2021 optimism?
Is
it time to buy U.S. stocks?
Update
on U.S. fiscal stimulus
And
much more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
In 2021 to date, we have seen sustained upward pressure on
the 10-year and 30-year U.S. Treasury bond yield, a signal that inflation
expectations are rising. The 10-year started 2021 yielding 0.93%, and as I
write, is now yielding 1.70%.3 That’s a significant move.
We’re also seeing price pressures in the real economy. The
housing market is a good example. Lumber prices have never been higher, and
crude oil – which is used in paint, drain pipes, roof shingles, and flooring –
has rallied over the past several months. Copper prices have also jumped by
nearly 40% since last fall, and brick, concrete, and insulation prices are all
higher as well, with many hitting new records in 2021. Taken together, these
higher prices for raw materials are putting upward pressure on the overall cost
of homes in the US today.
I expect more inflationary pressures in the coming years,
but I also believe the Federal Reserve has ample tools to keep it in check.
Allow me to explain both positions.
To understand why additional government spending could impact
inflation going forward, I think it’s useful to look back to the 2008-2009
Global Financial Crisis. Back then, the federal government also spent trillions
to revive the economy, and many expected runaway inflation. It never happened.
If
you go back to 2009, however, quantitative easing (QE) and other liquidity
programs just served to recapitalize banks after the devastation of the financial
crisis. Banks desperately needed capital reserves, and most of the stimulus
just ended up parked on bank reserves. In order to trigger inflation, dollars
need to move around the real economy – not sit on bank balance sheets.
Fast-forward
to 2021. Banks are already well-capitalized, and a lion’s share of government
stimulus payments have come in the form of direct transfers – stimulus payments
to families, PPP and Main Street loans (which essentially become grants),
expanded unemployment benefits, child tax credits, and more. Though many
American families are saving their stimulus payments, a significant portion of
stimulus payments are not sitting on bank balance sheets. The money is moving
around the real economy.
The end result is that the M2 money supply is rising at an
unprecedented 25% year-over-year rate, which is faster than during the
inflationary period of the 1970s:
In short, I think the case for future inflation is pretty strong.
But I’m also not too worried about it today. The U.S. economy still has plenty
of slack, and rising money supply is a good driver of growth. If inflationary
pressures start in earnest, it will be a sign that the economy is returning to
full health. Remember, some – but not too much – inflation is a good thing.
The Federal Reserve has made it clear they are comfortable
seeing inflation run above their long-term target. So, seeing inflation in the
2% to 3% range would be acceptable, and would not put the economic expansion at
risk. If inflation runs hotter than that, the Fed can easily step in and raise
interest rates and sell bonds to tighten monetary policy. There are plenty of
tools available to fight inflation, but I don’t think the Fed will have to use
any of them in 2021.
Bottom Line for
Investors
I agree inflation is a growing concern. I just disagree with
framing it as an urgent concern today. The U.S. economy still has plenty of
runway to return to pre-pandemic strength, and there is plenty of spare
capacity and slack in the labor market to keep prices from moving too high too
quickly, in my view. Inflation could very well become an economic issue down
the road, but I just don’t think it will be a major concern in 2021.
At Zacks Investment Management, every decision we make on behalf
of clients is data-driven and fueled by the power of independent proprietary
research. If and when inflation becomes a significant concern, we will factor
it into our decision-making process.
While inflation may not be an urgent concern today, it’s still important to understand how to navigate through it. To help you do this, I recommend focusing on key data points and economic indicators that could positively impact your investments in the future. To guide you, I am offering all readers our Just-Released April 2021 Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:
S&P
500 earnings growth
Outlook
for underlying U.S. economy?
U.S.
returns expectations for 2021
What
produces 2021 optimism?
Is
it time to buy U.S. stocks?
Update
on U.S. fiscal stimulus
And
much more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
1 Wall Street Journal. March 21, 2021. https://www.wsj.com/articles/stimulus-checks-have-left-u-s-households-flush-to-spend-11616335200
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 U.S. Department of Treasury. March 22, 2021. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2021
4 Fred Economic Data. February 23, 2021. https://fred.stlouisfed.org/series/WM2NS
5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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