By: Matt Garrott

The S&P 500 continued its bull run, returning 5.3% during the month of April. You wouldn’t know it from the headlines, though. Instead of cheering increased vaccination numbers, inflation worries dominate the news.

Inflation has picked up by 2.6%, but it is not present across the entire economy. Home prices are up, but rents are down. Lumber prices are up, but timber has fallen flat. Businesses with exposure to physical goods are feeling inflation.

Broad inflation numbers are up due to the base effect – the year over year data series starts at an extreme low. Fixed income experts at PIMCO also attribute part of the bounce to a shift in demand during the pandemic. As service industries were taken offline, consumers bought more physical goods. PIMCO expects to see this reverse as the economy reopens. Would this be the opposite of the toilet paper hoarding phenomenon from the beginning of the pandemic?

The bump up in inflation is not unexpected and may last for several months. Bond managers we’ve spoken with expect inflation to return to pre-pandemic levels (2% or less) shortly thereafter.
What about rapidly rising M2 and government spending? As M2 has risen, we’ve seen a corresponding drop in the velocity of money (the number of times a dollar is used to buy goods or services within a certain amount of time). As far as spending goes, Japan hasn’t been able to spend its way into inflation with a debt to GDP of over 200%.

While we lean towards agreeing with the bond managers that inflation will pop up and then settle back down later this year, client portfolios are not reliant on predictions one way or the other.

The world is still in a period of rapid change. It is also a time of unprecedented access to data and other humans’ opinions which can lead to a temptation to DO SOMETHING, ANYTHING. It is a stressful environment. Investors should keep their focus on long-term reality, not disaster fantasies. Having a financial plan that actively adapts (rebalancing, tax-loss harvesting) without the need to overreact to daily headlines is an advantage.

Taxes are another way wealth can erode and there is a lot of airtime dedicated to debating potential legislation. Be wary of making changes that cannot be undone. It is our experience that there is usually a gap between what a politician says and what actually becomes law.

One of our main goals is to worry about things like inflation and taxes so our clients can focus on enjoying life. The last twelve months have snapped this mission into focus for us as we have felt the loss of family, friends, colleagues, and clients. Peace of mind is a precious commodity. We sincerely hope that by placing your trust in us to manage your finances, you are free to be fully present in your life with the people that truly matter to you.

Fairway Scorecard 4-30-2021