Spring is in the air and signs of hope abound as the US economy emerges from the pandemic-induced recession of 2020. Pent-up consumer demand seems certain to boost this year’s summer vacation season. The Purchasing Managers Index (PMI®), a leading indicator of current economic activity, is signaling strong growth in manufacturing and service industries, with the Services PMI at an all-time high in March. Housing markets, outside of large cities, are booming across the country as many workers have new flexibility to work from home and more people feel safer with a yard than riding an elevator.
On top of this optimistic scenario, the $1.9 trillion American Rescue Act of 2021 was signed into law on March 11th. More than 100 million people will receive a tax-free $1,400 check in the third round of Economic Impact Payments. $350 billion will go to State and Local governments. $170 billion is targeted toward schools and colleges. And now, our politicians are negotiating the American Jobs Plan, a $2 trillion infrastructure proposal. One potential consequence of significant fiscal stimulus while the economy is already expanding organically is an increase in inflation. Rising prices for food, energy, health care and entertainment could reduce the purchasing power of our investment assets.
How does the threat of future inflation impact our investment strategy? A corresponding increase in interest rates would likely drive down the value of our Bond holdings. But higher interest rates make Bonds more attractive relative to the current dividend yield paid by Stocks. Stock valuation ratios in the US are high, but first-quarter corporate earnings are expected to grow by more than 20%. Foreign Stock valuations are more reasonable, but economic recovery outside the US may be less certain. Globally, Stock values have recovered by more than 50% from the bottom of the Bear Market 12 months ago.
While it may be a good time to take some profits, long-term investors should not be too worried about inflation. In fact, two asset classes have benefited the most from all the money sloshing around the economy – Stocks and Housing. As the economy opens back up, more consumer spending will be directed toward travel and family gatherings, and costs for those activities will likely rise. But we believe Stock values and Housing prices will continue to benefit from government stimulus programs as people funnel money into their homes and retirement accounts.
If you have some Cash you want to invest or you are looking to buy your first home, the high values for Stocks and Housing are intimidating and could cause you to delay making a decision. For investors, putting your Cash into Stocks over time could be a prudent strategy. But in today’s low interest rate environment, holding a high percentage of your portfolio in Cash and Bonds will not provide the long-term growth most people expect from their investments. A diversified portfolio with a meaningful allocation to Stocks looks like the best strategy to achieve long-term growth of your savings even with the threat of inflation.
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This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or cborden@canbyfinancial.com
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Talk to your financial advisor before making any investing decisions.
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