Bond&Devick Market Insights

Bond&Devick Wealth Partners Market Insights

November 30, 2021

During our client meetings we hear the same questions:  how bad will inflation get?  Are our portfolios protected from inflation?  Will the Covid virus continue to mutate and cause economic and market disruption for years to come?

These are great questions and we thought we would take some time and address these concerns.

1. Inflation – everywhere we turn prices are going up.At the gas pump, the grocery store, new cars, used cars, utility bills – up, up, up.It feels like the 70’s and 80’s again how can we be sure inflation won’t get away from us again like it did back then?
   • First let’s look at what has been causing the run up in prices.The service sector was shut down for a better part of a year and is still not fully reopened.Restaurants were closed, hotels were empty, planes weren’t flying, stadiums were quiet.Americans were stuck at home and what did they do?They bought stuff.They bought a lot of stuff.The businesses that make all of the stuff were offline or understaffed and when demand goes up and supply goes down there is only one way for prices to go and that is up, up, up.
   • As people start to do more activities (travel, dine out, go to the movies, etc.) they will buy fewer things.As the global supply chain catches up and rebuilds inventories it is logical to conclude that prices will come back down.Do you remember when the cost of lumber went through the roof as everyone did home improvement projects?People stuck at home decided to finish basements, add a room or two and the price for lumber skyrocketed with no end in sight.According to CNBC, over the past 6 months, the price of lumber has come down by almost 60% and the cost for lumber is what it was in January of this year.Apparently, everyone is done finishing their basements and adding more rooms to their homes.The price for used cars also went through the roof – until it didn’t.Prices for used cars have also come down significantly (down about 50% according to Manheim used auto data) over the past few months as everyone who wanted to buy a used car either bought one or they decided to wait for the prices to come down.
2. Where are all of the workers?We hear about it every day – companies cannot find employees.
   • Workforce participation rate was at 66.5% 20 years ago.Starting in 2009 it started drifting lower and is currently at 62%.Retirees most likely account for much of the reduction in the participation rate as the percentage of people over age 65 has grown by 4%.Many retirees who worked part-time jobs may have quit due to Covid.We also have a reduction in immigration over the past 5 years.On top of that we had an opioid crisis that forced many people to leave the workforce.
   • Wages have gone higher, which is a good thing for many workers.Higher wages do tend to have a positive impact on inflation – the question is how long will workers have the upper hand?Technology is reducing the number of workers needed for many low skilled jobs and the amount of people who are part of unions is much lower than it was in the 70’s.Unions give workers bargaining power.It is hard to have consistently high inflation without wage pressure.
3. What will be the impact of the Omicron and other Covid variants?We believe the biggest impact the Delta variant had on the economy was to exacerbate supply chain issues.The Omicron variant could do the same – it all depends on how transmittable and how deadly the new variant is.The life cycle of the virus may be longer than we had hoped, and each variant may be more contagious but less deadly which over time should result in the economy normalizing, especially supply chain issues.We simply do not know enough at this time.
4. While inflation may stay higher for longer than first anticipated, we believe the current economic environment is not conducive to hyperinflation and we expect a more modest inflation rate of 2-3% over the next few years.