Here’s all you need to know. (If you’re in a rush.)
- New COVID cases in the US plummeted to lows of the Pandemic, but the story is not as bright for other parts of the world, and concerns remain as new variants emerge.
- Inflation spiked, as expected, but evidence continues to suggest the effects are likely temporary and concerns for hyperinflation may have been overblown.
- Major US stock indexes continue to reach new highs, even as pockets of speculation and volatility continue to rule the headlines.
- The jobs recovery continued, with 850,000 jobs added in the US in June alone¹.
- US stocks have now doubled in just 15 months, logging the fastest doubling of the S&P 500, following a 20%+ decline, since the Great Depression².
And now for the long(er) version…
“To plant a garden is to believe in tomorrow”
As the 2021 days grow longer, hotter, and brighter, so too it seems does the outlook and optimism of US investors and consumers alike. In stark contrast to last summer, America is vibing again and a new normal seems to be here to stay.
While it may still be far too early to call an end to the Pandemic, the US vaccination effort is largely being viewed as a huge success. But that doesn’t tell the entire story, as much of the world continues to suffer with a lack of vaccine access and several, more contagious variants of the virus continue to emerge.
As far as global markets are concerned, the COVID-19 Pandemic will continue to be the primary driver of social and economic policy for the foreseeable future. But for US investors, financial markets have begun to look well beyond the doom and gloom of the last 18 months. In fact, US stocks are ending the second quarter once again at all-time highs³.
Inflation heats up. Big time! (As expected.)
Our last quarterly recap focused heavily on market expectations for coming inflation and how that was impacting both stocks and bond interest rates in the short-term. As it turns out, inflation numbers came in extremely hot in the second quarter, just as predicted by virtually everyone. BUT there is some very important context that can be all-too-easy to overlook, just as the Federal Reserve has been repeatedly trying to tell us in recent months…
We have to remember that we are coming out of an historic economic crisis that took place in 2020, which actually caused a period of temporary deflation in certain sectors and supply shocks that we are still working through today. Just like stock prices, when the price of goods and services fall dramatically due to a sudden demand shock to the system, we can reasonably expect them to bounce back once the contributing factors are sorted out and demand returns.
The Federal Reserve has been warning investors and consumers for the last year that in the second quarter of 2021, inflation numbers were likely to see a temporary and “transitory”, but dramatic spike. This is mainly due to the fact that the comparison is year-over-year. This highlights a phenomenon known as “base effects”, or the impact of comparing current data to a depressed “base” of economic data that turns out to be more of an outlier than anything to be used to indicate a sustained trend.
At the highest level, prices are driven by two factors: supply and demand. Prices have bounced back from depressed levels due primarily to consumer demand, which is a very positive economic sign. When you combine that with supply issues from worker shortages and supply chain bottlenecks, you have a recipe for some temporary overheating when it comes to prices. But the key will be whether or not that overheating becomes a sustained trend, which would NOT be a good thing. Most signs as of now indicate that the inflation we’re seeing is the good (transitory) kind and not the crippling kind that so many seem to fear.
In short, as we said last quarter, it seems the worry of widespread and sustained higher inflation or even hyperinflation, was likely overblown, at least based on the latest data and commentary from the Chair of the Federal Reserve⁴. And as some investors seemed to panic in the first quarter with the prospect of rising 10-year bond interest rates, those same yields that spiked and caused a stock sell-off, ended up falling back to Earth quite a bit in the second quarter. And now here we are, once again at all-time highs for the major US stock indexes.
Inflation is complicated, and of course the other significant aspect we aren’t getting into here is the ever-expanding money supply. You can read more about monetary policy and inflation here, if you’re interested. And we know you are!
How far we’ve come…
So far in 2021, the S&P 500 is up a whopping 14.4%⁵. And in just 15 months, US stocks have now doubled from the lows following the market crash in March of 2020. This makes it the fastest “doubling” of the US stock market following a crash of at least 20%, in nearly 90 years⁶. And this happened at a time when the entire global economy came to a halt.
The lesson? If you’ve been paying attention you won’t be surprised that our advice was, and continues to be, to stick to your long-term strategy and to not get deterred, even in the face of a crisis like we just experienced. But as any investor knows all-too-well, often the hardest thing to do as an investor is nothing at all. Especially when the sky seems to be falling, as it certainly felt like last year.
There are an endless number of reasons for investors to be optimistic right now, but at what point does optimism begin to disconnect us a bit from reality? Some recent research seems to indicate that investors may be getting overly optimistic about stock returns in their portfolios going forward, based mainly on the historic stock returns we’ve seen over the last 15 months.
A global survey conducted by Natixis shows that individual investors now seem to expect an average annual real rate of return of 14.5% for stocks, whereas financial professionals expect a much lower 5.3% per year going forward.
What’s important for blooom clients to remember is that returns are neither constant, consistent, or predictable. Anchoring to a specific rate of return expectation, especially one like 14.5% per year – roughly double the historic annual return of stocks, can lead to big mistakes, like altering your strategy when things go wrong (like in March of 2020).
It’s easy for our minds to trick us into thinking markets constantly rising over time is the ideal scenario for us long-term investors. But in reality, the very reason for returns like we’ve seen the last 15 months in the overall market, is actually the crash that acts as the base for that timeframe.
Without pullbacks in the market from time to time, long-term investors making regular contributions to their accounts don’t have opportunities for the historically higher returns stocks have provided compared to other asset classes.
This is very similar to what we’re experiencing with inflation right now. Just as inflation has risen rapidly, mainly due to an economic crisis that caused deflation and a global halt in economic activity last year, stocks have now doubled, but only after falling roughly 40% first.
Food for thought: While the market has doubled off the bottom from March 23, 2020, if we simply move that start date back to 2/19/2020 (just before the COVID crash began), US stocks are up less than 30%⁷. Still a pretty amazing number, but less than a third of the returns we’ve seen from the bottom. It may feel a bit counterintuitive to think this way about markets, but the crashes, pullbacks, and volatility the market experiences by nature, truly are the very reason disciplined long-term investors tend to have the most success growing their wealth over time.
While last year’s crash now feels far-off, at some point markets will crash again, likely for an entirely different and unpredictable reason. This will test your ability to stay disciplined and focused, as it always does.
So if anchoring yourself to a specific return expectation is a recipe for disaster when it comes to your long-term goals, what CAN you do? Our advice is to focus on the things you actually can control, like the amount you’re saving/contributing in your retirement accounts, HOW you’re invested, and how you tend to react to the emotions you feel in different market environments. This is our reminder to you that these are all the areas blooom has expertise in, and will continue to help you with.
Believe in tomorrow!
Things are good right now. Summer is here and both the stock market and economy seem to be running on all cylinders. Inflation speculation and worry will likely continue to grab headlines and new data may ultimately change the narrative. But as always, the most important thing for you to focus on is your own personal investment strategy and sticking to it. After all, your investments, especially in stocks, tend to be one of the best ways to combat the effects of long-term inflation on your wealth.
The Audrey Hepburn quote that kicked this recap off reminds us that “to plant a garden is to believe in tomorrow”. Investing is no different. To define your goals and put a strategy in place for the long-term requires an optimistic outlook. And while optimism alone cannot determine your success, optimism can stem from the confidence of having a proven strategy that’s right for you. Just as maintaining a garden requires a plan and ongoing maintenance, so too does an appropriate long-term investment strategy.
And if your situation has changed in any way or you feel uneasy about whether you’re on track to meet your goals, now is the time to revisit your strategy and/or talk to a blooom advisor. After all, this is why we exist!
The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.
³Quarter ending 6/30/2021, using S&P 500 Index
⁴Source: https://apnews.com/article/inflation-health-coronavirus-pandemic-business-6e7c813472a3eb706e0cdafe305c1477#:~:text=WASHINGTON%20(AP)%20%E2%80%94%20Federal%20Reserve,increases%20will%20likely%20prove%20temporary. As of 6/29/2021,
Source: Morningstar Research, S&P 500 PR Index returns (2/19/2020 – 7/7/2021
⁷Source: Morningstar Research, S&P 500 PR Index returns (2/19/2020 – 7/7/2021)
Published on July 8, 2021