Will Inflation Be Temporary Is the Big Question Right Now
In the last two months, our nation transitioned to a new President and cabinet. We’ve vaccinated more than 50 million people. And, recently we voted on a third fiscal stimulus package, The America Rescue Plan Act of 2021, valued at $1.9T. The abrupt rollback of Trump-era policies concerning oil independence, border security, and a firm stand on China. But none of these actions seem to matter for the stock market….even the inflationary concerns. The Federal Reserve claims it will maintain an easy monetary policy for the foreseeable future; full unemployment is the target, most likely reached sometime in 2023.
A year-ago, we worried with securing face masks, toilet paper, hand sanitizer and cleaning supplies. This earnings season quarterly corporate earnings should come in strong. We expect buybacks and a rise in M&A activity throughout the next year. Another enigma to us, is the fact that on the political agenda is now a $2T infrastructure plan. The infrastructure proposal is extensive, loosely defines infrastructure at times, and extends for many years. It is concerning to us the pace at which the folks in Washington keep pushing these “trillion dollar” spending agendas. Why not let the dust settle before putting even more on the backs of the average American? Infrastructure is a good thing. We surely need it. But do we really need it this second? Probably not, in our view.
Monetary Policy – Despite Inflationary Concerns by the Broader Markets, The Fed Holds Steady
The Federal Reserve continues to be in a critical economic position in 2021. Chairman Powell remains committed to easy monetary policy and is confident that inflation remains under control. The market vacillates on this point and is concerned from time-to-time that inflation may be a problem. It is our view, that the Federal Reserve remains data dependent and would move sooner to raise rates than year-end 2023 should strong economic conditions persist. Recall, the Federal Reserve has stated that inflation would need to exceed 2% and stay above that hurdle for some period of time before it would raise rates.
The Fed has also acknowledged GDP growth and inflation will likely spike because of the magnitude of the stimulus as well as the year over year comparisons (last year at this time the economy was haulted so growth was negative, making year over year comps very big). Further, the Fed expects the inflation spike to be temporary and that these respective measures will move lower. The inflationary tug-of-war drove the 10-year Treasury yield to 1.74% from 0.93% at year-end 2020. The Fed played a critical role thus far during the pandemic, and we believe it will be even more important, over the next 12-24 months. A healthy and growing economy could have a Fed funds rate back near 2% by year-end 2023 and that is an appropriate level that could accompany healthy GDP growth and inflation levels.
Fiscal Policy – Maybe there is room for just one more?
In March, the U.S. approved The America Rescue Plan Act of 2021, valued at $1.9T, bringing the total covid-related stimuli to nearly $5T. Comparisons to other major economies across the world have been difficult, however, it does appear that the US has taken the lead of stimulus as a percentage of GDP. Clouding the calculations are some countries’ existing social infrastructures and loan programs that may ultimately be forgiven. The IMF increased its projection for global growth to 6% in 2021 and 4.4% in 2022, based upon the vaccine rollout across the world and thus, the renewed economic growth. According to the CDC, more than a third of the U.S. have one dose of the vaccine and one-quarter are fully vaccinated.
Our Long-term Themes
The long-term investment themes are framed in Jamie Dimon’s (CEO of JPM) letter to shareholders this year. We were reminded of the Business Roundtable agreement from 2019 that was signed by 181 CEOs. “… corporate success as serving shareholders principally to endorsing a modern standard of corporate responsibility: to serve all stakeholders – customers, employees, suppliers, communities and shareholders.” The letter is a commitment to shareholders, communities, and the country. With each passing quarter, more companies are stepping up their commitment to include their communities and the environment. Our long-term themes remain 5G, Healthcare, Infrastructure, and Tangible Assets such as commodities, real estate and precious metals.
The new administration’s introduction of the $2T infrastructure plan, The American Jobs Plan, will now grind through the political machinery. While there is bipartisan support for portions of this plan; it is an enormous plan and much too large. We believe a much smaller, focused, version will likely pass later this year. For example, a Chips for America plan, announced in June 2020 with bipartisan support, and included in The American Jobs Plan, received tremendous airtime at a recent White House meeting.
We regularly post market commentary, and it is important to remember that these are short-term views as we customize respective asset allocations to the individual’s time horizon and risk characteristics. We thank you for your continued faith and trust in us. Stay safe, healthy, and informed.