As the stock market continued its recovery from pandemic lows, the US economy started firing on all cylinders with a strong surge in consumer and business activity. The dynamics of the recovering economy, record levels of idle cash, and pent-up pandemic savings led to the Tuesday, July 6th Wall Street Journal front-page headline: “Individual Investors Pour Record Cash Into Markets.” From a short-term perspective, this is great news for the investment, commodity, and real estate markets, driving intense pressure on prices and inventories and resulting in higher prices and strong investment returns.
The intense pressure on prices has also affected wholesale and retail level inflation as the economy adjusts to the rapid rebound in consumer demand. Inflation has thus become a hot topic of worry and speculation in the financial markets; while we remain aware of the risks of inflation, we agree with the Federal Reserve Board’s assessment that the current reflation of the economy is temporary and that inflation will return to the Fed’s target of a 2.5% long term rate. The recent decline of the 10-year Treasury bond yield to 1.25% is a market confirmation of moderate to low future inflation expectations.
While we at Arlington certainly enjoy participating in strong markets, we must ask what this exuberant spending and investing means for future investment returns. A useful exercise in considering this question is to differentiate future expected returns from “bull and bear markets.” Bull and bear markets are popular shorthand for the kind of volatility that drives investors to make bad decisions. Bull markets stampede forward as investors become greedy, use leverage, and throw caution to the wind, driving stock prices to unsustainable highs. Bear markets see normal stock price declines turn into routs as fearful investors sell positions at any price, creating liquidity shortages and freezing market mechanisms. These bull and bear cycles disrupt investors from focusing on the true long-term drivers of returns and wealth generation, the progress of businesses growing their earnings over time.
–Arlington Financial Advisors is located at 100 E. De La Guerra St, in Santa Barbara. For information call 805-699-7300, contact [email protected] or visit https://www.arlingtonfinancialadvisors.com/.