2021 Mid-Year Thoughts on the Markets and Economy
If there is one constant with investing it is that there is always something to worry about. In other words, there are always concerning headlines, disappointing economic results and fears about the future. This is exacerbated by the financial media, which is why I always advise investors to turn it off; ignore it. And if you just can’t help yourself to look, at the very least do it with the correct lens. That lens is that the media is all about getting you to click/tune in, and market “experts” are experts in only one thing - delusion. They have no clue what will happen and have a fantastic track record proving just that.
Whether times are good or bad, the media often will portray things negatively. Year to date there are two main “stories” – the fear of inflation and a heated market. Understand that the “evidence” used to make these stories is highly biased and incomplete. Data mining is when you select the data that supports your story and ignore all the rest. That’s what happens on a daily basis. To ensure you have the proper perspective moving forward, allow me to comment on these two media-induced concerns.
Rising Inflation – There is no doubt that some sectors of the economy are experiencing strong inflation as demand outpaces supply. These inflationary pressures are expected to be temporary. As prices rise, the demand will naturally decrease while supply chains catch up. This can go both ways (inflation and deflation) as the markets adjust. Think of hand sanitizer last Spring. You couldn’t find it, and if you could the prices were quite high. Now companies are giving the stuff away due to oversupply and drop in demand. Eventually it will work itself out and find a long-term equilibrium price.
We haven’t experienced much inflation at all (as an overall economy) for a long time. We aren’t used to it, but a little inflation is healthy. While we don’t know what will happen, experiencing strong inflation or even deflation are possibilities, but the base case at the present moment (most probable scenario) is some inflation. You may hear nothing but stories of inflation, but I assure you there are ample economic reports showing a lack of overall inflation. Remember, the information presented to you is to support the story the media/expert wants to tell. While markets historically perform stronger with declining inflation, they also have a history of positive returns in increasing inflation environments. Stocks have historically been the best hedge to inflation along with income producing real estate. As inflation rises, landlords can increase rents to offset inflation.
Heated Market/Economy – If investors don’t buy the negativity of inflation and other media-proclaimed “disappointing” economic results, perhaps they will be concerned that things are just too good right now. The market has had a great run after the “Corona Crash” and for the past decade. Stock market returns over the past decade have been higher than the long-term average. You might be thinking, “we’re due for a change”. Not necessarily. If you look at market performance since 2000 (two decades of performance), you will find that stock market average returns were lower than the long-term average. So which is it? Have we experienced higher or lower returns than average? It depends on what dates you use. Market timing is a losing proposition. Best to just stick to the strategy.
There are some reports of consumer debt being at an all-time high. Yes, that can be quite concerning and feed into the fear of a heated market. But what they don’t say is that household debt, as a percentage of assets, hasn’t been this low since the 1970’s. Our collective net worth is healthy because household assets have been growing at a much larger pace than household debt. That one piece of information changes the entire story. This is a major reason why investment decisions should not be based on headlines or “expert” prediction. There are often two sides to every story/prediction.
Final Thoughts – I don’t know what is going to happen going forward. That is why we follow a disciplined strategy based on your risk preference and seek to take advantage of the mistakes of other investors (when prices get insanely high or fearfully low – like March 2020). What do we do then? We adhere to our plans and let the talking heads say what they will and the market to do what it does. We will get a significant sell off at some point. You will see your accounts go down in value at some point in the future, there will be a lot of fear spewed by the media; be mentally prepared for it. In such times, we will remain disciplined to our plan, and should things get excessive, we are ready to take advantage of it for your long-term gain.