The good news is that from mid-August 2020 to mid-August 2021, the market is up around 34 percent, as measured by the S&P 500 Index. Furthermore, in August 2020, the market was just shy of pre-pandemic levels, making the rally exciting for investors. The bad news is that inflation is 5.4 percent month over month, as measured by the Consumer Price Index. Producer prices increased 7.4 percent in June, which likely means we’ll continue to see consumer prices increase as increases are passed on to the consumers.
Inflation happens when too much money is chasing too few goods. While some consumers are flush with cash from government stimulus, federal unemployment, rent relief, and eviction moratoriums, 60 percent of Americans saved their stimulus payments or applied it to their debt, according to the National Bureau of Economic Research. The majority of those who spent their stimulus ended up buying groceries and paying rent or bills. Bankrate reports that just 13 percent of stimulus recipients spent their money on discretionary activities and nonessential items.
So, what is causing this rampant inflation? In short, it can be traced to labor shortages, supply-chain disruptions, and past increases in energy prices.
Although we’ve seen the federal unemployment rate improve to 5.9 percent in June 2021 from the devastating 14.8 percent we experienced in April 2020, the problem is the labor force participation rate has only recovered half of what it lost during the pandemic. Americans are not seeking work. The Labor Department reports more than 10 million job openings—more than a million more jobs available than people searching for them. Unfortunately, this is hitting small businesses the hardest. According to the 3Q 2021 CNBC Momentive Small Business Survey, 50 percent of small business owners report it is harder now to find qualified employees than a year ago, and 41 percent are experiencing a rising cost in wages. On top of wage increases, 86 percent of those are also reporting rising supply costs.
Since small businesses make up 50 percent of our country’s gross domestic product, the perception that the economy is struggling is easy to see. However, when you look at the S&P 500 earnings, 99 percent have reported second-quarter earnings growth, and 27.5 percent have reported sales growth. Therefore, I believe the stock market is one of the best hedges against inflation for investors. Corporations have an easier time passing on rising input costs to consumers.
Consider the most common investment alternative: Bonds are netting negative returns after inflation. The most likely scenario includes interest rates increasing in the next few months. Knowing that, it is also likely bond prices will fall leaving you with few attractive options outside of stocks. While you might not expect much out of your bond portfolio, it is still a great place to avoid potential volatility in stock prices if you need to keep assets sheltered for planned spending within the next 10 years.
While the economy might feel stressed, if you are invested according to your financial plan, you should be in good shape to weather this bout of inflation.