1<\/sup><\/strong><\/p>\n\n\n\n__________________________________________________________________________<\/p>\n\n\n\n
I\nwould argue that all of this excess liquidity, combined with ultra-low interest\nrates, did lead to inflation \u2013 just not the traditional, CPI type of inflation\neveryone talks about. What we saw instead was asset price inflation, in the\nform of a surging stock market. But in order to trigger consumer and producer\nprice inflation in the real economy, there needs to be too many dollars chasing\ntoo few goods. With excess liquidity locked up in bank balance sheets, the\nopposite was true in 2009 and many years thereafter. <\/p>\n\n\n\n
Fast-forward\nto the 2020 crisis, and we have a setup where banks were already well-capitalized\nheading into the downturn. What\u2019s more, the pandemic-induced recession led to a\ndeflationary shock that hit consumers, small businesses, and generally\nspeaking, Main Street versus Wall Street. Banks fared just fine. <\/p>\n\n\n\n
In\n2020, the fiscal and monetary response was many times larger than the 2008-2009\nspending packages, andthe trillions\nof dollars in stimulus spending have essentially been direct transfers into the\nU.S. economy (versus just sitting on bank balance sheets). The U.S. government\nboosted unemployment benefits by $600\/week, made direct payments to U.S.\nhouseholds with stimulus checks, spent trillions on business loans (PPP, Main\nStreet Lending, and bailouts), and has now signed a new stimulus package with\nmore liquidity on the way. These dollars are not sitting on bank balance sheets\n\u2013 they are out circulating in the real economy. <\/p>\n\n\n\n
Evidence of liquidity in the real economy can be seen in\nhousehold savings. American households are not dipping into savings\u2014they are adding to them<\/em>. Households have\nadded around $2 trillion in savings deposits since last February, thanks\nlargely to stimulus payments and to the savings accrued by services sector\nclosures. These accrued savings are likely to drive a spending surge later in\nthe year, in my view, and may surface as an inflation driver.<\/p>\n\n\n\nTotal Savings Deposits\nHave Soared Over the Last Year<\/strong><\/p>\n\n\n\nSource: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/p>\n\n\n\nThe end result of \u2018direct transfer\u2019 of liquidity into the\nU.S. economy is that the M2 money supply is rising at an unprecedented 25%\nyear-over-year rate, which is much faster<\/em>\nthan during the inflationary period of the 1970s. As you can see in the chart\nbelow, M2 money supply barely ticked higher during the Financial Crisis, for\nreasons described above. In the current environment, however, M2 has soared: <\/p>\n\n\n\nSource: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n\n\n\nThe implication is that rising M2 money supply could give\nway to inflation in the not-too-distant future. I\u2019m not sure we should be\n\u201cworried\u201d about inflation in 2021, but we should certainly be eyeing it\nclosely. Indeed, historically, there is a fairly tight historical correlation\nbetween M2 money supply and inflation.<\/p>\n\n\n\n
Bottom Line for Investors<\/strong><\/p>\n\n\n\nFor investors, remember that the expectation of rising\ninflation often puts upward pressure on interest rates, particularly\nlonger-term rates like the 10-year U.S. Treasury. If inflation is a factor,\ninvestors want to be compensated more for locking-into a 10-year bond, thus\nrising interest rates. In 2021, the interplay between inflation and interest\nrates will be a key fundamental to track. To the extent inflation drives\ninterest rates higher, we may reasonably expect a reality check for high valuation\nsectors, like Technology.<\/p>\n\n\n\n
Upward pressure on inflation may also put some pressure on\nthe Federal Reserve to tighten monetary policy, though probably not in the form\nof raising interest rates in 2021. Recent history with the equity market\u2019s\n\u201ctaper tantrums\u201d reminds us that dialing back accommodative monetary policy (even\nif just scaling back QE) can give way to volatility, which is especially\nprevalent in a stock market with a relatively high P\/E. I expect more\nvolatility in 2021 as a result. <\/p>\n\n\n\n
Instead of trying to predict the possible highs and lows of the market, I recommend staying focused on what matters – key data points and economic indicators that could impact your investments. To help you do this, I am offering all readers our Just-Released February 2021 Stock Market Outlook Report. <\/a><\/strong><\/p>\n\n\n\nThis report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n
Economic expectations for 2021<\/em><\/li>2021 capital markets expectations<\/em><\/li>A look at Covid-19 and vaccine distribution<\/em><\/li>What produces 2021 optimism? <\/em><\/li>What of U.S. GDP growth?<\/em><\/li>A look at U.S. continuing claims for unemployment and Covid job data<\/em><\/li>Zacks Rank S&P 500 Sector Picks<\/em><\/li>And much more<\/em><\/li><\/ul>\n\n\n\nIf 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!
Government stimulus and pent-up spending demand make rising inflation a real possibility this year<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-9252","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9252","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9252"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9252\/revisions"}],"predecessor-version":[{"id":10469,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9252\/revisions\/10469"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9252"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9252"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9252"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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