If there’s one thing you need to know about the economy right now, it’s that things are changing rapidly. Nearly every time we prepare communication about it, the message is inaccurate or irrelevant by the time we can distribute.
As circumstances evolve, however, these are the three main things we’re watching on clients’ behalf.
Inflation: It’s on everyone’s mind right now and not just because of volatile food and energy costs. Core inflation for the 12 months that ended in April was 3.1% – above the Fed’s target of 2%. Keep in mind that this 2% is a long-term goal, and we are comparing against numbers from the depths of last spring’s recession. While inflation is normal, and some of it is a sign of a growing economy, sustained high inflation can lower our purchasing power and put pressure on individuals and businesses alike. While most of our inflation seems to stem from pandemic-related supply chain issues, we can’t rule out other longer-term causes. We’ll continue to monitor this factor closely as more numbers become available.
Interest rates: If higher inflation is sustained, we will be very mindful of how interest rates affect our fixed income holdings in the immediate term. With conflicting information from the Fed and how the market has priced the 10-year Treasury, it’s tough to know what will hold in the short term.
Equity performance: We’re monitoring the shift in equity performance from growth stocks to value stocks. Historically, value outperforms growth when the economy is coming out of a recession. However, growth has vastly outperformed value over the past 10 year and is favored if interest rates remain low. We don’t want to make changes that will set us up for underperformance. In the near future, we will likely add a value position in portfolios for further diversification but with tax sensitivity and economic data in mind.
There’s a lot at play in the markets right now, and we encourage you not to be too focused on one factor or another – because they change almost daily. However, if you’re feeling uneasy, we’re always available to review your financial strategies and long-term goals.
Blog by Andrew Gaskill, Financial Services Manager.