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The Price is Wrong?: Q3 2021 Market Commentary

By: Mark Paccione, CFA, CFP®, BFA™
4 Minute Read

My family’s recent trip to the Outer Banks proved a great snapshot of the current economy. To start, what should’ve been a two-hour trip took over four hours as the roads were packed with vacationers ready to have the summer vacation they missed last year.

Upon arrival, we found restaurants at maximum capacity with slower service than normal due to a severe labor shortage. Almost every place we visited had a “Help Wanted” sign. Some restaurants were only open for part of the week and others simply posted a sign pre-apologizing for the expected slow service due to staff shortages. The labor shortage is so severe that some national food chains are offering signing bonuses to attract new hires.

What’s The Current Market Signaling?

As businesses raise wages in response to the labor shortage, consumers should expect the prices they pay for goods and services to increase in response. You may have already noticed the significant rise in the price of items such as housing, gas, wages, food, and airline tickets. This general increase in prices is called inflation. The following chart shows how the inflation rate, as measured by the Consumer Price Index (CPI), has risen significantly recently:

[1]

Inflation is the main concern for many investors today. The problem is especially acute for retirees living off their nest egg. The working population can offset the cost of inflation by receiving the benefits of inflation in the form of higher wages, higher home values, and often higher stock prices. For retirees who tend to have a significant portion of their investment portfolio in bonds, the increase in prices often means the nest egg provides for less than it did before prices increased.

Should Investors Be Worried?

The good news is that we believe the current, higher-than-average inflation level will prove transitory as the U.S. Federal Reserve has indicated in recent communiques. It’s not surprising that there are currently mismatches in supply and demand. The world economy grinded to a halt in 2020, and it will take time for supply and demand to find a post-pandemic equilibrium—especially as parts of the world are still very much dealing with the pandemic.

The chart below shows how abnormal the supply situation is with companies reporting exceptionally low levels of inventory:

[2]

Supply disruptions and demand should stabilize in the not-too-distant future, thus alleviating inflation pressures. Interest rates, as measured by the U.S. Treasury 10-year yield, increased in the first quarter to a recent high of 1.75% on March 31, 2021. However, interest rates have since declined to 1.3% as of July 12, 2021.

We would expect interest rates to head higher, not lower, if inflation was going up significantly in the future, since one of the factors that determine bond yields is a premium for expected inflation. Right now, we believe market inflation is not currently a significant risk or a long-term problem.

What Portfolio Actions Should You Take?

Assuming we are correct, and high inflation rates are a temporary phenomenon, then dramatic action by most investors would not be warranted. However, there are some things investors, especially retirees, can do to mitigate risk:

  1. Consider delaying purchases on items where prices have risen due to low inventories.
  2. Consider taking advantage of elevated prices. If you were considering downsizing your home, now may be a great time to do so as home prices have risen significantly in many areas given the extremely low housing inventory.
  3. Make sure your portfolio is well diversified. Equities, real estate, infrastructure, commodities, and some types of bonds can offer protection against inflation.

In our opinion, this is not the time to be complacent with your investment asset allocation. We know from experience that what worked in the past may not work moving forward. Reviewing your financial plan and aligning it with the proper allocation is important to consider.

Partner with Your Wealth Advisor?

If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of the Curi Capital team at 984-202-2800.

Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.

Past performance is not a guarantee of future results. All investment strategies involve risk and have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and indexes do not reflect the deduction of the advisor’s fees or other trading expenses.

[1] Source: Strategas

[2] Source: Strategas

Mark Paccione, CFA, CFP®, BFA™
Mark Paccione is Curi Wealth Management, LLC’s, Chief Investment Officer, based in Raleigh, NC.
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