This historical performance should come as solace for equity investors concerned about the November 12 labor report putting inflation at 6.2%. Inflation is widely projected to moderate, so this could put the rate in the sweet spot for equities as the best hedge.
“Even if that’s true, how can you know what equities are most advantageous for me to own at a time like this?”
The performance of key parts of the market during high inflation is a matter of record. Some sectors and styles have historically posted good real rates of return on average during such periods. According to a study by Dimensional Fund Advisors, these styles and sectors posted the following average gains when inflation exceeded the median in years between 1927 through 2020: small cap value 12%, energy 10%, large cap value 8%, and financials 6.3%. This time around, industrials’ infrastructure subsector should do well in the next year or two, according to trend analyses showing that impacts of the $1 trillion infrastructure bill aren’t yet fully priced into some of the companies affected.
“I hear the supply chain bottleneck will probably last for years.”
This is a groundless fear, as supply chain issues are already resolving. Qualcomm CEO Cristian Amon told CNBC recently that he expects his company’s supply issues to ease materially by the end of the year, enabling it to meet demand in second half of 2022. This projection for an industry greatly affected by supply chain disruption sharply contradicts pessimistic projections of bottlenecks lasting indefinitely.
What’s more, the FAA’s end to banning many foreign travelers in early November not only opened up a lot of airline business, but also accommodates increased throughput of specialized industrial cargo. And even now, domestic inventories aren’t as paltry as they’re often made out to be. Constricted supply is intersecting with pent-up demand, but this tension will ease as supplies continue to increase.
“I’m afraid we may have a pandemic resurgence, with nasty new variants that could turn the market bearish.” Though the pandemic is far from over, the severe pandemic of 2020 and early 2021 manifestly is. The Delta variant is now a shadow of its former self, as about 60% of Americans are fully vaccinated and the recent approval of vaccinations for children will bring the nation closer to herd immunity. Also, new pills from Merck and Pfizer could significantly reduce the number of serious outcomes from infection. This means that more people—especially the unvaccinated—will be emboldened to take jobs from among the millions currently open, and that more people will go out, travel, and spend money.
“Many seem to believe that current high inflation will lead to a weak market the rest of this year.”
Actually, historical seasonal effects suggest that the overall market will probably get a strong year-end tailwind. As of mid-November, the S&P was up 25% for 2021, and 22.5% through the end of October. There have been only nine times in the last 75 years when there have been 20% (or greater) year-to-date gains for the S&P 500 through October 31. In all these years, the S&P 500 rose in both November and December. Also boding well for returns the rest of this year is the fact that 2021 isn’t an election year. Since 1990, the fourth quarter has returned an average of 4.7% for the S&P 500. Most of the bad fourth quarters in this average were in federal election years. So much for help from politicians.
The pandemic created chaos because it took us into uncharted economic territory. It’s only natural that there would be a little chaos on the other side.
Though the Fed may be tapering stimulus and raising interest rates, the market will adjust and resume—or sustain—its long-term growth from the powertrain of innovation and economic productivity.
In the short term, there will be spending aplenty from what’s left of Americans’ forced, pent-up savings, estimated by Black Rock at nearly $650 billion. After all, consumer spending is what the U.S. economy, the biggest consumer economy on to the planet, is largely about.
Dave Sheaff Gilreath, CFP, is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and Sheaff Brock Investment Advisors LLC. Based in Indianapolis, the firms manage about $1.4 billion.