Good Financial Reads: Trends of 2021 (So Far)

There’s been increasing chatter in the market about inflation. Reported inflation numbers from the government have repeatedly failed to rise above the Federal Reserve’s 2.0% target. But with another round of stimulus underway and consumer spending booming, will we finally see higher inflation in 2021?

With interest rates at historic lows, many investors feel nervous having bonds in their portfolio, given that bond prices have an inverse relationship to interest rates: when interest rates start to go back up, bond values will fall, causing principal losses for bond portfolios. And while this inverse relationship is accurate, I hope to show in today’s post why this fear is overblown.

First, though, let’s take a step back for a moment and talk about the role bonds play in a portfolio, and why the investment characteristics of bonds makes them ideally suited for that role.

Banks and consumers have a long history of having short memories. Financial mistakes made by one generation of bankers and consumers are inevitably repeated by following generations. In the housing market, we’re watching a trend that contributed to the housing crisis 15 years ago: Cash out refis are making a comeback.

The government reported disappointing employment numbers for April, leading many to question what’s going on. Anyone who’s been out and about at restaurants and stores has likely seen plenty of Help Wanted signs. Yet jobs growth continues to fall short of expectations. This is causing employers to raise wages, so costs to end-consumers move higher. More and more, inflation is in the news, as we noted last week regarding the global computer chip shortage. The key issue now is whether this emerging labor shortage will push inflation even higher?

Our dishwasher broke two weeks ago. In looking for a new one, we looked at the websites of all the major appliance retailers you can think of. A theme quickly emerged: “Out of Stock.” If you’ve been in the market for an appliance or car, you may have noticed that inventories are low and prices are much higher. You can thank a global shortage of computer chips for these increasing prices. What’s going on, and how does this chip shortage affect the economic outlook?

Volatility is the price investors pay for making money in stocks and bonds. While no one can predict when periods of volatility will happen, there are clues we can look for that may signal an increase in volatility. We’ve been keeping our eyes on two dynamics which we believe create an environment for higher volatility. The first is a divergence between the stock market and a popular indicator for stock market volatility. The second is the surge in investor margin debt. Both suggest to us we should prepare for more volatile markets.