As a financial advisor, some of the most frequent questions that I am asked are my thoughts on the stock market and the economy. The questions are usually part of a larger discussion but typically fall into the categories of “Do you think stocks keep going higher?” or “What could derail this economic recovery?”. I won’t attempt to answer these questions in a short post, but I do want to highlight a few areas that have my attention right now. These topics are important to both individuals and businesses alike and have broad implications for the markets and economy, both here in the US and globally.
I will preface that these are my opinions and there are plenty of smart investors, journalists, and economists that have written much more extensively on these subjects. I enjoy reading their articles/research pieces and following the trends and updates on these subjects. I’ve linked to some of these pieces below.
What’s Important Right Now?
- Interest Rates – When most investors talk about Interest rates, they are usually talking about the yield on US government bonds. The government issues bonds of varying maturities including the 10-year government bond. The yield on this bond has many implications for other financial instruments throughout the banking, investment, and finance areas. The big questions facing investors right now are 1) do interest rates stay low and if so, for how long? 2) do they start increasing and if so, when? how high do they (rates) go?, and how fast? As the Federal Reserve starts to wind down the economic support that started with the pandemic last year, it’s possible they start considering raising rates in the second half of 2022. This will have an impact on mortgage rates, yields on savings accounts/CDs and exchange rates to name a few.
- Inflation – We are currently experiencing inflation rates higher than what we’ve seen historically over the last 20 years or so. The big question facing investors (but mostly policymakers in Washington) is this – is the current inflation we are experiencing transitory or structural? My guess is that the inflation debate will continue into next year since we still aren’t quite sure what a post covid world looks like.
- Employment – The pandemic and ongoing recovery has created some interesting issues in the labor market. The main issue seems to revolve around the fact that that there are both lots of job openings while there are a lot of people unemployed. This is further complicated by the issue of people quitting their jobs at record rates or dropping out of the labor force entirely. Barry Ritholtz has a great post on this subject, as does the Washington Post.
- Supply Chain Issues – One of the biggest stories of the year has been the supply shortages and supply chain bottlenecks, as evidenced by the extreme backlog at the LA port for example. This is largely tied to Covid and the factory shutdowns in Asia last year now causing a backlog as the global economy and supply chains reopen. The big questions worrying investors right now are can these supply chain issues get resolved before it financial impacts individuals or company profits? A larger issue is that the global supply chains were already fragile, so do these issues present more structural issue hiding in plain sight. Ben Thompson at the Atlantic has a great piece on all of this: America Is Running Out of Everything
- Oil/Commodity Prices – The last area that I believe is important, and has a lot of investors on notice, right now is the swift rise in energy prices, predominately oil and natural gas, and commodities. In fact, the discussion around a commodity super cycle has picked up more and more recently. As the prices of energy, metals, and other raw materials keep increasing, it will be important to watch the impact on the consumer (higher gas prices at the pump, higher airline fares, lumber costs, etc…). If prices keep rising and stay elevated, I believe it could derail the economic recovery heading into next year.
In addition to the above, there are other items (of lesser importance in my view) that impact the markets and economy that could become more meaningful over the next few months/quarters. This includes new tax legislation, debt ceiling/deficit issues, real estate prices, and consumer spending.
If you have questions/thoughts/concerns, feel free to send me a message. Also, please excuse any grammar errors 🙂
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