Americans know their day-to-day expenses are rising: The cost of grocery staples has been on an upward trend for months, gas prices have risen by 20 cents a month and more than $1.20 from a year ago, and multiple government inflation. Benchmarks are hitting levels not seen in years or even decades.
Some leading economic voices have weighed in with their concerns recently. Twitter co-founder Jack Dorsey recently issued a depressing prediction: “Hyperinflation is going to change everything. It’s happening,” he said. tweeted Friday night.
Clinton’s former Treasury secretary and White House adviser Larry Summers was less sharp, but more in his criticisms: “We are in greater danger than we have during our careers of losing control of inflation in America,” he said on a virtual the seminar Earlier this month, he described what he described as “a generation of central bankers who are defining themselves by their awakening” in Western economies.
There’s definitely a line where the consumer says, ‘No more.’
Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have both said recently that they expect inflation to last longer than it did a few months ago. in a CNN Interview On Sunday, Yellen said inflation is likely to remain above optimum through the second half of 2022. She specifically denied Summers’ warning, saying, “This is something that is clearly a matter of concern and concern to them, but we haven’t lost control.”
on a virtual the seminar On Friday, Powell said “longer and more permanent bottlenecks” in the supply chain are causing more severe choke points than policymakers expected, prompting them to consider a wider range of economic consequences.
While buyers may be upset, however, investors seem to be unfazed. Inflation warnings aside, the stock market continues on an upward trajectory. The Dow Jones Industrial Average and the S&P 500 both hit record highs last week, and resumed their upward march on Monday. Main Street may be digging deep in its pockets, but Wall Street is upbeat.
“The market is probably saying it’s probably not as dire as more extreme calls from pundits or policymakers,” said Ross Mayfield, an investment strategy analyst at Baird. “A lot of inflation metrics are high, but they are certainly not indicating hyperinflation,” he said.
Sean Bandazian, an investment analyst at Cornerstone Wealth, said, “Hyperinflation like in the 1970s is problematic … it’s very different from the ’70s, when high levels of inflation were combined with slow growth and high unemployment – it there is a problem.” “We have temporary supply issues – and there’s still a ton of demand – and we have 10 million job openings. We don’t necessarily see the inflation and economic system of the 1970s coming.
Some market observers attribute rising equities to the longer duration of the current low interest rate environment, which they say leads investors to seek returns in stocks rather than low-yield bonds. “They’re taking money out of fixed income and putting it into riskier assets. That’s what we’re seeing happening behind the scenes,” said Darren Schuringa, CEO of the ASYMemetric ETF. “Investors have nowhere else to turn. Is.”
“What would be most problematic for the stock market is a hyper-inflation type regime where the Fed has to act quickly to raise interest rates. [but] Increased inflation doesn’t necessarily mean a death wish for the stock as a whole. In fact, deflation is generally worse,” Bandazian said. He added that sectors like energy and financial services often benefit when inflation warms up a bit.
Investment professionals said that despite the sticker shock Americans may be feeling at the gas pump or supermarket meat counter, the combination of rising wages, an advanced savings rate and low revolving debt levels has served as a buffer against the most painful effects of rising prices. have worked in. . “People have saved a lot of money,” Shuringa said. “The consumer is not the problem … “The individual balance sheets are not in bad shape, nor are the corporate balance sheets in really bad shape.”
And the tight labor market is pushing wages higher, especially at the lower end of the income spectrum.
“One of the things that drives headline inflation higher is wages,” said Rob Howarth, senior investment strategist at US Bank Wealth Management. “On the one hand, yes, we are seeing concerns about headline inflation, but consumers still have enough room to sustain or increase spending,” he said.
As a result, corporate earnings have largely stalled, to some degree even higher than expected — and the markets love an upside surprise. Dustin Thackeray, Partner and Chief Investment Officer, Crewe Advisors, said, “You are looking at earnings in the good third quarter… margins have not really been impacted to the extent that many were expecting, given the increase in wages and The cost of goods is going up.”
Companies have been able to maintain their profits by passing cost escalation to customers. The question is to what extent they can continue to raise prices without seeing a drop in sales. “At some point, if they are too aggressive, companies may be hit back,” Thackeray said. “There’s definitely a line where consumers say, ‘No more.’ ”
“They really believe they have pricing power at this point. They are able to raise prices without hurting their unit sales growth,” Howarth said. “If we see consumer spending falter … that will hurt earnings growth,” and that will dampen the current investor enthusiasm.
The trajectory of the pandemic also remains a wild card. Experts say the coronavirus, although better controlled now than it was a year ago, could still wreak havoc in the economy – precisely because it is no longer front and center.
“I think a major covid shock on a global basis that causes economies to shut down will cause another correction in the market, as it is no longer baked in,” said Shuringa. “A spike in Covid, especially with vaccinations – I think it will take the markets down,” he said.