TransitoryMay 18, 2021 -
Categorized in: IAG News
One of the most popular buzz words in the financial markets these days is transitory. You will likely be hearing that word quite frequently in the coming months as the financial markets’ short-term direction is likely dependent on your belief in it.
Just over one year ago, the monetary and political leaders of our country resolved to reignite a shuttered economy at all costs. The Federal Reserve slashed their overnight interest rates to almost nothing and promised to keep them there indefinitely. They also dusted off and expanded programs from the Global Financial Crisis to keep the financial wheels turning and support bond prices by buying assets.
Congress did its part by sending out billions of dollars directly to taxpayers, massively increasing and extending unemployment benefits, and spending trillions of dollars they did not have.
It worked. We successfully avoided a deflationary spiral and the economy is well on its way to full recovery. The downturn proved transitory.
Now monetary and political leaders are hoping that the unintended consequences of their efforts will also prove transitory.
Last month’s inflation report showed one of the largest monthly jumps in core prices since 1982. The good news is that Americans are quickly returning to “normal” life. The bad news is that providers of goods and services may not be ready for that.
One of the core tenets of economics is that prices generally rest at the intersection of supply and demand. Currently, demand for houses, lumber, vehicles, appliances, food, and employees exceeds supply for many varying and different reasons – from supply chain issues, to chip shortages, to lack of qualified employees, to low interest rates, and many others.
If consumers start believing that the prices they must pay for what they need or want will continue trending higher indefinitely, they will be motivated to buy what they need or want today. Why put off buying until tomorrow what you can buy today at a lower cost?
Much like the stories about hoarding of paper products, meat, and most recently gasoline in the Southeast, people respond to scarcity by buying as much as they can when they can get it.
This is why it is so important that you personally believe that the blip of inflation we are seeing right now is transitory.
You can wait to buy what you need in the future. Prices will return to normal shortly. There is no need to accelerate your purchases to create more inflation.
If you don’t believe in transitory inflation, then your expectations for sustained higher inflation can create a self-fulfilling prophecy of sustained higher inflation.
The financial markets have just begun to wrestle with the different outcomes of transitory versus sustained inflation, and we believe this will be a primary driver of market volatility until transitory is proven true or false.
Quote of the week: Morgan Housel: “If enough people believe something’s true it’s just as powerful as actually being true.”
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
Past performance is no guarantee of future performance. In fact, the opposite can be true. The information contained in this report does not purport to be a complete description of the securities, markets, or development referred to in this material. Investing involves risk including loss of principal.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.