Recently one of the stock market indices, the S&P 500 did an amazing thing. It doubled from the low in March of 2020 to its August 16, 2021 close in only 354 days. We often hear about the disconnect between stocks and the economy but why is this so? The economy has not doubled since March of 2020?
The main reason the stock market rebounded so quickly is that it is not a measure of the present, it is a measure of the expected future. When the pandemic hit early last year, the future was uncertain. A novel virus with unknown health and economic consequences urged many market participants to sell and wait for clarity. What has happened since then? Governments around the world have infused capital into economies and scientists have developed vaccines, so now we have a line of sight to a world with robust economic activity once again. The combination of access to capital and optimistic expectations have driven the stock market higher. However, is this a good thing? Generally yes, the stock market is just one of our financial institutions and when this system is thriving, the economy benefits. Banks are more willing to loan to people with assets, these people can invest in businesses and homes, jobs are created, profits are made and reinvested into more assets and so on.
So how can we predict what will happen next? We have mentioned it before but predicting precisely is not possible. What we can do is put ourselves in multiple positions to be successful. Over time, economies and the successful companies in them will grow at least at the combination of population growth plus inflation. Obviously, our economy has grown much faster than that because we cooperate and innovate to constantly enable new opportunities. Imagine going through 2020 without high speed internet or a smart phone. We can’t even imagine what will be invented in 2035 just like we could never imagine an iPhone in 1990. We will create, businesses will make profits and Blue Summit clients will share in a piece of those profits.
We wanted to quickly address inflation. The “I” word has been inescapable lately, why is this? A few things are going on at the same time.
First on the high inflation numbers we are already seeing come in: these are expressed in “year over year” terms, and last year prices were low. People were not buying in 2020, there were no flights, car lots were closed. Therefore, the comparable is a normal over a low, not a high over a normal. You could say we have experienced two years of normal inflation in 2021 after skipping 2020.
Is this growth temporary or “transitory” as you may have heard on the news? That is still to be determined and will be a substantial driver of economic policy over the next few months. The virus is still significantly affecting supply chains globally and employment locally, so supply and therefore prices have been affected. It is important to keep in mind that small amounts of inflation are common and actually a positive for much of the economy including stock prices. What we do not want to see are sustained levels of moderate inflation – anything consistently over 4-5%. This is something we continue to monitor. We also pay attention to interest rates. They are still very low and so are the expectations for interest rates in the future. This is a signal that the expectation for inflation is not high in the future. Interest rate policy is also a tool that can be used by Government’s to stem inflation if it persists, but not without other consequences.
The bottom line is that we are still transitioning from a pre-pandemic economy to one where the virus is managed. There is uncertainty and there will be friction. There will be market volatility. Our goal and our job is to invest your assets appropriately for your situation. We continue to monitor your assets, make adjustments where appropriate and always be proactive. If there is anything you need or questions you have, please reach out to our office and we will be happy to assist.