It’s often said that bull markets climb a “wall of worry”. Despite investor tendencies to wring our hands and discount every imaginable issue into stock prices, markets tend to shrug off short-term noise, after all, that’s what most of the “worry” is, and trend generally higher. (This corollary is a close cousin to Keynes’ oftrepeated quip that markets can stay irrational longer than one can remain solvent.) In this letter, we’ll discuss a few of today’s worries and offer our take on them. Some of these fall under the category of ‘problems for another day, but for others, that day may be soon approaching. First, however, let’s give this discussion some context. Does anyone really want to bet against this chart?
Inflation would appear to be the latest entry on the worry list. Despite Fed Chair Powell’s insistence that today’s rising prices are transitory, and likely short-lived, it’s tough not to feel the impact of $4+ gasoline, soaring home prices (the S&P CoreLogic CS 20-City home price index has risen +20% from a year ago!), and rising food costs (bought any milk or steak lately?). Not to mention the rising cost of labor, with $15+ minimum wage all but set in stone. We doubt these labor costs will be rolled back anytime soon (which is probably a good thing). The nature of today’s price increases, the product of a global pandemic, supply chain issues, federal stimulus, and historically loose monetary policy by the US Federal Reserve, may indeed prove anything but transitory, and this is not yet reflected in asset prices.
Further, historical parallels are being made with 1970’s style “stagflation”, as pandemic induced supply shocks result in slowing growth and surging prices. The ultimate outcome is neither clear nor decided at this point. It truly is a period of unprecedented events and challenges on numerous levels. While stagflation isn’t our base case, we do feel today’s inflationary pressures will be with us for some time. Equities, short-term bonds, and commodities are all reasonable assets to hedge inflation. Moreover, if our inflation outlook is wrong, these assets should perform well regardless.
Larry Whistler, CFA
Larry joined Nottingham in 2006 and heads the Investment Policy Committee, along with portfolio and relationship management responsibilities. Prior to joining Nottingham in 2006, Larry worked as an independent RIA for two years, and before that spent a decade as a bond trader for Merrill Lynch Capital Markets in Los Angeles and New York City.
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