May 2021 Economic Update

May 2021 Economic Update

Guardian Rock Wealth™

Nearly every economic indicator is pointing towards a strong recovery. Why, then, does the market not seem as strong in the face of these new data points? The market is forward-looking. Much of the good news has been priced in. Some company stocks recently fell despite reporting arguably good earnings. This type of drop generally happens when the information was not quite good enough, and future expectations begin to wane. We continue to recommend that investors keep their eyes firmly focused on the long-term horizon and not concern themselves with shorter-term market fluctuations.

This month we will address three of the most pressing items concerning investors currently, inflation, taxes, and volatility.

The following report suggests some forward-looking thoughts about the market and some practical things investors may want to consider as we move throughout the remainder of 2021.

• Inflation

• Taxes

• Volatility 

Inflation:

The debasing of currency is nothing new. The Romans did it in the third century, and China did it in the 14th century by replacing coins with paper money. More recently, in 2019, Venezuela experienced an estimated 200,000% inflationary environment. The United States has never experienced true hyperinflation. In our opinion, we are not likely to see it any time soon.

The historical inflation number for the U.S. has been, by most measurements, around three percent. As of late, this number has been much lower. Some would say we may be due for some catching up. Indeed, with trillions of dollars being essentially “printed,” we can see where this could easily happen as we recover from the pandemic.

Many will argue, and rightly so that inflationary pressure has been and will be primarily offset by innovation which has brought costs down over time for the same type or better outcomes. As raw material prices spike in the first months of 2021, the idea is that innovations will enable less waste and more efficient use of these materials for an even better outcome. We expect commodity prices to continue their march higher, and it is worth noting that we have still not reached the levels seen during 2008 and 2009 according to the GSCI all commodity index.

Inflation, particularly here in the U.S., has not been even. Healthcare and educational costs have increased many times over compared to some other cost of living expenses. This may mean that your inflation number is much different than the nationally reported Consumer Price Index or (CPI). The personal inflation number is vital for investors to understand and apply to their situation.

Your costs expectations should be based on your inflation number and not to take lightly. Innovation has, and we believe, will continue to produce better results and significantly reduced cost in the healthcare field. However, demand increases and legal costs may offset the expected cost declines, as has historically been the case in this sector.

Suppose you take the simplistic view and assume that inflation holds at the historical average of around 3%. In that case, most traditional fixed income solutions and any cash holdings are creating a drag on your ability to keep up with inflation. While many look to history to justify the idea that fixed income reduces volatility, we would suggest that it may be adding risk to your portfolio in some cases. Please reach out to us by clicking here if you would like us to provide a free analysis of your current portfolio.

Taxes:

As trillions of dollars flow into the economy from our federal government, the specter of rising taxes may soon become a reality. Few were surprised when our president suggested doubling the capital gains tax and started pushing this agenda through the system. We doubt that the full scope of Biden’s proposal will make it through the political gauntlet. However, we would not be surprised to see some increase in the capital gains tax to become effective for 2022. Anticipated tax increases should not impact long-term investment strategies. However, it may be advisable to look at some tactical trading decisions before the end of the year. Be sure to reach out to us for questions on this front by CLICKING HERE or calling us at (312) 372-5000.

Volatility: 

We expect volatility to increase as we progress through the remainder of the year. The markets generally trade in anticipation of events. We believe that tactical trading in advance of expected tax increases is likely. This activity has the potential to cause an increase in volatility as we head towards the second half of the year. We suggest revisiting your cash needs over the next 12 months. If this type of stomach-churning volatility concerns you, there are tactics that can be used to mitigate some of this movement. As always you can contact us to have a look at what you are doing now by CLICKING HERE.