In the contest for strangest year, 2021 has come out of the gates and immediately challenged 2020 for the lead. A shirtless gentleman with a painted face and Buffalo-Skin hat just took over Congress. The times- they are a changin in many ways- socially, politically and, of most interest to us, economically.
In 2020, Covid-19 was the catalyst for an unprecedented reaction from The Federal Reserve and Treasury Department in order to cushion the blow to the U.S. economy. M2 Money Supply has increased 24% in the past six months as dollars are printed to fund stimulus efforts. Never has so much money been created in so little time (in the U.S.) Why might this matter? Well, all else held equal, your dollar is worth 24% less than it was before the virus. But...if instead of dollars you held something else like gold, silver, copper, iron ore, wheat, soy, corn or...Bitcoin, then you could exchange those items for far more dollars today than you could six months ago.
What I’ve just described is inflation. Is it here? Is that 2021's strange twist in finance? Well a dictionary will tell you that inflation is the increase of money supply so, yes, as I’ve said, that has been radically inflated. But the average consumer usually thinks of inflation as rising prices of goods. You may not see that in the grocery store or gas pump yet, but the financial markets are telling, and maybe fore-telling a different story. Look at what has happened to some assets since the March/April 2020 low till the time of this writing.
S&P 500 74%
Why did I include a stock and index in this analysis? Because it is possible for stocks to inflate as well - ownership of a company, while dollar denominated, is not currency. If selecting stocks or sectors in a time of inflation, it is prudent to select companies with good balance sheets and low valuations- in essence- value stocks. Their success usually comes at the peril of higher multiple growth stocks with little cash-flow predicted in the near term and high debt levels. With inflation usually comes higher interest rates which hurts companies when they roll over their debt.
When investors move their money from one sector or style to another it is called rotation, and we have seen this flow from large cap to small cap and from growth to value since September. This trend might seem long in the tooth but at Frazier Investment Management, we’ve been buying value for our clients for over six months and we continue to do so. These shifts are monumental and typically not short-lived.
Keep a close eye on this trend and on the prices you pay for goods to gauge the existence or lack of inflation. It has been called a “silent tax” because it evaporates your purchasing power if you hold dollars. For many years it has been less than 2% but, if it is truly creeping up, be smart about how you manage your money and understand the implications of holding cash.
*Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
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All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
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