While COVID cases have been sinking here in the United States, new jobs are rising (559,000 in May), corporate profits are rising, housing prices are rising, commodities are rising, consumer confidence is rising, the economy (i.e., GDP) is rising, and stock prices are rising. More specifically, the S&P 500 was up +2.2% last month (+14.4% for the year), the NASDAQ climbed even faster +5.5% (+12.5% for 2021), and the Dow Jones Industrial Average was flat (+12.7% year-to-date).
Although the economic tide may be lifting all boats, there is a small leak spreading in the boat in the form of inflation. Rising prices can slowly sink all boats by eroding away income and wealth creation. Fortunately, Jerome Powell, the Federal Reserve Chairman is doing his best to patch the inflation hole by signaling an end to Quantitative Easing and eventually initiating interest rate hikes by 2023. Inflation is currently running hot at 5% over the last 12 months (see chart below), but the long-term trajectory remains consistent with 2% trendline growth (see Calafia Beach Pundit).
Source: U.S. Inflation Calculator
Gas prices certainly have not gone down as you can see from the gasoline data below from GasBuddy.
The Fed still perceives inflation as temporary (i.e., “transitory”) due to short-lived, supply-related bottlenecks caused by a surge in demand after the broad, post-COVID economic reopening. Restaurants are filled; hotels and flights are packed; cruise ships are back out at sea; and workers are returning to the office. All these factors are causing a big swell in demand for goods and services, while suppliers are finding it difficult to hire workers fast enough to meet the flood of orders. Just last week, American Airlines (ticker: AAL) canceled 950 flights in part due to its short-staffing and inability to meet the avalanche of demand.
Infrastructure Spending Serves as Life Jacket
The U.S. economy has been anchored by increased federal debt but Congress has opened the spending spigots with trillions of dollars in additional stimulus spending. Most recently, President Biden has coalesced an agreement on a $1.2 trillion bipartisan infrastructure bill with the goal of further aiding the economic recovery from the 2020 recession. But as you can see from the chart below, there still remains a multi-trillion dollar deficit between spending and tax revenues. If the gap does not narrow from more measured spending and/or accelerated tax revenues, then the debt issue will only become greater.
Source: Calafia Beach Pundit
Fortunately for the government and Americans, interest rates are near historically low levels – the monthly yield on the 10-Year Treasury Note closed at 1.44%. Given these dramatically low interest rates, the government is able to shoulder larger amounts of debt just like an individual is able to hold a larger mortgage on his/her house if the interest rate is at 1% rather than 10%. The chart below illustrates that despite record debt levels, the interest payments being made on this debt is at 60-year low levels.
Source: Calafia Beach Pundit
The post-COVID recession recovery continues, and this rising tide is lifting most sectors of the economy that were sinking 15 months ago. To meet this rising tide of demand, employers continue to hire. Even with millions of new jobs added in recent months, there are a multi-decade number of job openings (9.3 million) – see 2000-2021 chart below. The expansion won’t last forever, but until the next slowdown, investors are “all aboard!”
Source: Bureau of Labor Statistics
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2021). Subscribe on the right side of the page for the complete text.
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