When the pandemic began over a year ago, we offered our thoughts on the financial and economic repercussions that often follow a natural disaster. With a financial crisis, such as the one that occurred in 2008, there are fundamental cracks in the system that typically cause the fallout. Things like being over-leveraged, stock bubbles, or instances of significant fraud can result in devastating and lasting market effects. A natural disaster, however, is not necessarily accompanied by any of these characteristics. In fact, heading into the pandemic, both personal and corporate financial statements were largely healthy. Because of this, as we return towards a sense of normalcy, the recovery has been unprecedented. Performance numbers for 2020 were incredible and will likely stand out for years to come, if not decades.
Looking forward, we see a dissonant economy. Spending has surged, particularly in areas that saw pent-up demand during the pandemic. At the same time, supply chains have faced a variety of bottlenecks, creating a notable gap in many regions between consumer demand and availability. Items are back-ordered or unavailable, and wait times are high. This is also true for service-driven industries where labor supply is limited by various factors, including temporarily enhanced unemployment, lack of childcare availability, and the reality that it simply takes time to start things back up again. It takes time to interview candidates, just like it takes time to find and obtain the right amount of supplies to produce a given product. As organizations re-figure out how to execute their missions efficiently, we will likely see much of this supply-demand gap diminish as pent-up spending is spent out and supply chains are smoothed.
In the meantime, there has been much talk about inflation. You don’t have to know that headline CPI has been notably higher than historical averages to know that things are costing more. You can just as quickly look at the increased price of a gallon of gas right now or the fact that a bag of groceries costs quite a bit more than it did a year ago. If that hasn’t stuck out to you, you’re probably still aware that real estate prices have been red hot as of late, with homes across the country selling quickly and for significant premiums. While inflation concerns are being spouted in the news, data suggests that the spike is only temporary. We already see hints of that reality as some markets begin to cool, albeit slightly. As we move into the fall, we will likely see this data further smoothed as children return to schools, employees continue to return to work, and spending becomes less erratic.
Turning to the markets, we also see a similarly complicated picture. Price-to-earnings measures remain elevated well above historical averages even as companies continue to report impressive earnings numbers. Inversely, we see yields suggesting lower growth in the future as consumers settle back in. The Federal Reserve has indicated it will remain accommodative in the near term while allowing inflation a little more room to float as they move towards targeting an average. This will likely mean a continuation of low rates in the near term, with gradual upward movement likely around 2023.
Overall, we remain cautiously optimistic about the second half of 2021. While assets remain mostly reasonably priced, we want to be mindful of economist’s expectations of lower growth in the future. As such, we continue to drive all investment decisions from a planning perspective, recognizing that client success is rooted in the security and robustness of your individual financial plans. If you’d like to review your financial plan and discuss the potential impacts of lower growth expectations, please don’t hesitate to reach out to us from our contact page.