You Paid What for That?!

Did you notice that you are paying 9.9% more for eggs and 5.6% more for apples than you did a year ago? Or that a new refrigerator will cost you about 20% more than it did pre-pandemic? Did you know that the backup of container ships at our California ports stands at 29, with an average of 11 days before they can unload?  Prior to the pandemic, there was at most one boat waiting.

None of this should come as a surprise. The COVID-19 pandemic turned life as we knew it upside down.  To keep our nation from the brink, the government flooded the economy with $9 trillion in stimulus money, unemployment benefits were increased, and interest rates were brought down to near zero. The increased money supply, in turn, boosted the demand for goods and services; however, suppliers have not been able to keep up.

When you consider the continual political wrangling, the rise in interest rates, the stress of the oil markets, and more, there are certainly reasons to be fearful of the strength of the economy and its effect on the stock market. However, there are also reasons to be optimistic. This is by no means the end of U.S. prosperity nor a signal of a long-term stock market decline. Is it still a good idea to be invested in the market? Absolutely.

Today’s positive signs

Consumer spending is the greatest source of economic growth. With consumer net worth at $142 trillion, there is plenty of cash to keep the economy going strong. In the near term, holiday spending for goods and travel will drive economic growth.

Source: Federal Reserve. Copyright Clearnomics, Inc.

Like consumers, companies have strong balance sheets as well. They are currently sitting on $2 trillion of excess cash. In addition, they are experiencing strong growth. Year-to-date earnings growth for the S&P 500 was 26.3% as of September 30, 2021.

September’s closely watched key economic indicators point to strong growth, though companies do note transportation bottlenecks, increased prices for inputs, and difficulty retaining and finding staff. As these issues improve, growth should be even stronger.

On the health front, progress is being made toward potential herd immunity, which in turn should allow businesses and schools to remain open.

Source: Centers for Disease Control and Prevention, Johns Hopkins CSSE, Our World in Data, J.P. Morgan Asset Management. *Share of the total population that has received at least one vaccine dose. **Est. Infected represents the number of people who may have been infected by COVID-19 by using the CDC’s estimate that 1 in 4.2 COVID-19 infections were reported. ***Est. Infected & vaccinated assumes those infected equally likely to be vaccinated as those not infected. Guide to the Markets – U.S. Data are as of September 30, 2021.

Suppliers are having a difficult time hiring enough staff to keep up with demand, as evidenced by 10.9 million unfilled jobs. While this may be frustrating while you wait for food at a restaurant, the number of jobs available can also be seen as a positive, with economic growth potentially even stronger as more workers get back into the workforce. The final dose of increased unemployment benefits expired September 6, and we are likely to see some of the 8 million people that were receiving these benefits return to the workforce. Also enticing more to join the workforce is average wage growth of 4.8%.

Lastly, we have an accommodative Federal Reserve. While the Fed has little control over the supply side of the economy, they can influence the demand side. If the economy looks to be overheating, they have the ability to slow the economy. One way is to taper their monthly purchases of bonds, thereby decreasing the money supply. Also in their control is the ability to raise interest rates to further steady the markets if growth gets too strong and inflation gets out of hand.

In summary, while we may continue to see some volatility, there are a number of causes for optimism that should give investors comfort. Ups and downs in the market are normal. In the end, economic growth will drive equity returns, and there are plenty of reasons to feel positive about the economy.