Second Quarter Investment Commentary 2021
If you’ve been watching the financial news in the past three months, you’ve seen an interesting trend:
In terms of total dollars, or GDP, the US economy has recovered completely from the pandemic.
Yet we still have upwards of 8 million people out of work. And we have about 8 million jobs unfilled in this country. (Is that just a coincidence? I’m not sure.)
Ask anyone. I met with a landscaper a few weeks ago. He is in desperate need of additional employees. Restaurants nationwide are limiting hours due to staffing. Banks are offering all sorts of incentives to restaff their teller lines after laying off so much staff last Spring.
How does this happen?
It seems like it’s a simple problem. There’s about 8 million people out of work. There are 8 million available jobs. Just hand them out, right?
Sadly, it isn’t that simple. It’s probably the complete opposite from that simple. There are differences in geography and qualifications and availability. It is 8 million needles in 8 million haystacks.
According to the business owners I’ve spoken with, the extended federal unemployment is compounding the problem. This is especially the case for lower ($15-25/hr) workers.
One client I spoke with retired last year after being laid off. He has been collecting $1,000 per week for most of the last twelve months. While lower-income workers won’t receive $1,000 a week, they might receive $800. And for many, earning $800 a week not working is better than earning $1,000-1,200 a week working.
Will this employment snafu work itself out? I believe so. I also believe it will work itself out, for the most part, by year-end. Job growth will continue as more Americans’ desire for more stuff outweighs the benefits of sitting at home all day long.
In addition, I suspect another phenomenon will begin to appear: Higher wages.
Wage growth has been fairly non-existent for several years. We’ve discussed this before. But recent data has shown that employers are paying more to attract workers.
On the surface, this appears to be good news.
But it might not be as good as you think.
What we really care about are what is termed “real wages.” This is a person’s income net of inflationary effects. If someone receives a 3% raise but prices in the marketplace rise 5%, they don't get a real increase in income. In fact, they got a “real” paycut.
So what happens when employers start paying more?
That money has to come from somewhere. On Friday, I took my wife and son out to eat at a local restaurant. We each had a soft drink, a main meal and we shared an appetizer. After tax and tip, the bill came to $100.
The food was excellent. The service was spectacular. But that meal was probably $80-85 18 months ago.
Some of that increase is the cost of food. In many cases, restaurant food costs have skyrocketed faster than you’re seeing at the grocery store. But some of that is likely higher wages paid to employees.
So what will most patrons do in response?
They will demand an increase in pay to compensate them for their additional costs. Which means their employer will need to raise prices in order to cover these additional costs. Which means their customers will feel a pinch and approach their employer. . .
And so on. And so on. And so on.
That’s how inflation works.
Wages go up, and costs rise to meet them. In the end, most workers don’t see an increase in lifestyle. We all just experience higher prices.
Is Inflation a Concern?
Several clients have asked if I’m worried about inflation. I’m not. We have had near zero inflation for far too long. Our fears are rooted in the worry that 4 or 5% inflation will cause the economy to collapse.
How quickly we forget the 1980’s when inflation was moderated in the 4-6% range. The economy boomed. The stock market hit new records. And we earned 5, 6 and 7% on bank CD’s.
Inflation will likely cause changes in both the Treasury and Federal Reserve. But these changes are necessary to bring our economy back to normal. Which is supposed to be their mission in the first place.
It might be a bumpy ride at times, but it is important that we return to a more responsible level of government.
For the quarter, the stock market, defined by the S&P500 was up about 8%. Year to date, the average has gained over 14%.
Interest rates continue to sit at historic lows. We’ve discussed many times in blogs and emails regarding the Fed and their desire to manipulate the markets with low interest rates.
What I am seeing is the financial markets are as tired of this manipulation as much as employers are tired of federal unemployment payments. While employers don’t have much control over their plight, the investment markets do have a say in setting interest rates. I suspect as the economy continues to improve, Wall Street will push interest rates higher, causing the Fed to act much sooner than they have anticipated.
Commodity prices have risen along with overall inflation during the quarter. Metals prices have stabilized in the last month or so but oil and gas prices are near their recent highs. Last week, at my local cheap gas station, I paid $2.99 for a gallon of gas.
It appears that lumber prices have stabilized as well. But the cost to build a home is still significantly higher than it was a year ago - and this may continue for another year or more.
As I look to the remainder of 2021 and beyond, I still see blue skies despite the potential for increased inflation. We are not at full employment - meaning we still have the ability to grow the workforce. Based on the signs we see today, it should be years before we reach a state of overheating within the labor markets.
The economy continues to move forward. Economic data published by both the federal government and other organizations points to continued controlled economic growth.
Short of an outside issue such as another pandemic or war or whatever, I believe there is little that could derail this economy. The US economy is resilient and strong. It has shown a great ability to shake off any small bumps that may be in the road.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.