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A Shot in the Arm

The second quarter news reports revolved around inflation.  Most experts and economists believe inflation is transitory - temporary.  The root cause of inflation today is different than most previous times, since inflation generally is not caused by economies shutting down and then reopening.  

Many factories around the world were shut down causing supply shortages, not because consumer demand outstripped supplies.  Worker shortages due to factory shutdowns and layoffs across many industries create supply chain disruptions and causing inflation to rise as global economies reopen.  The economic stimulus infused into the U.S. economy to get us to the vaccination stage has been a disincentive for workers to return to work.  This should change after the extra $300 weekly unemployment benefits run out after Labor Day.  As restrictions are lifted companies are attracting workers back by paying incentive bonuses to increase the workforce.  

Pent-up consumer demand is also contributing to the most recent rise in inflation.  Commodities’ prices have risen since people around the world were not travelling or commuting for the past year plus.  Consumers are spending at a pace the economy is having a hard time absorbing short-term.  Surge in demand for commodities and natural resources increase prices.  We feel the brunt of price surges every day at gas pumps, grocery stores and purchasing household items we need or want.  No matter what we consume, these days it either costs more or the products are not readily available.  

It is the perfect storm, short supplies and increased demand for goods and services plus a shortage of workers.  As economies are restarting, it will take time for worker shortages to subside.  Consumers drive all recoveries, and this time will not be any different.  

Since most of us have never experienced a pandemic and post-pandemic recovery, there are many opinions and outcome scenarios as to what may happen.  Reopening global economies is not any easier than shutting them down.  It will take time and patience on everyone’s part to shake off the effects of something we never thought we would experience. Common sense tells us that when you are going from zero activity to throwing open the doors, money needs to go somewhere. 

The amount of cash on hand in money markets, checking and savings is more than 4.6 trillion dollars, more than double the 2 trillion dollars on hand after the financial crisis of 2008.  Do not let the short-term lead you to think this is the 1970’s or early 80’s all over again when inflation peaked at 13.5% and money markets were yielding 12.68%.  Minneapolis Federal Reserve President Neel Kashkari said he expects recent high inflation readings will not last and Americans will return to the labor market in large numbers in fall.

Looking back to November 2020 we were excited to hear vaccines were coming.  For the first time we could envision an end to the Covid-19 nightmare.  Little did we know that the positive effects of reopening could bring on increases in prices due to supply chain disruptions.  We are learning as we go that it takes time to ramp up all economies as we reopen.  

Fortunately, the worst of the virus may be behind us for the near-term in the U.S.  However, the Delta variant is raging in some countries that have not had vaccinations available or low percentages of vaccination participation. There is always a risk that new mutations could bring it back.  Therefore, herd immunity is the best outcome for the entire world.  How we get there is yet to be written.  According to experts those who have been vaccinated and those who contracted the virus should be protected for now.   Uncertainty, however, is all around us and investors may at times be confused about understanding its effects on their portfolios.   

Although many individuals got their shot in the arm along with the economies around the world there is cause to pause. 

The ripple effects of the pandemic have caused early retirements and families to rethink if they can get by on one income or work fewer hours.  This could extend a delay in driving down unemployment numbers, which could keep inflation around longer than what experts are forecasting.  Mixed messaging continues to come out of the economies around the world as we reopen. Investors need to focus on what impacts us and our portfolios. 

Our messaging to our clients is to protect, preserve and participate no matter the case.  Managing the risk element of your portfolio enables us to appropriately allocate how much downside protection you need in fixed investments   and your ongoing lifestyle needs.  The key to make this work is the equity component to help offset against inflation over time.  This allocation protects the purchasing power of your money and keeps your portfolio intact.  We emphasize the importance of diversification for various reasons to get through the unknown.  Along the way we make changes to the allocation to balance out the risk and reward.  

Since the pandemic began, we adjusted portfolio allocations to improve outcomes, taken profits to fund cash flow needs, adjusted bonds to protect against inflation or rising rates and rebalanced portfolios to take advantage of opportunities in the equity markets. We will continue to monitor.        

We believe diversification enables us to manage risk within the fixed income area while providing a strong balance to support our equity positions.  During recovery times our balanced approach provides our clients with peace of mind knowing that risk within their portfolio is in alignment with their lifestyle needs.  This allows the portfolios to participate as the recovery continues.  

For the first time in more than a year, we are feeling some hope—or at least cautious optimism—that the pandemic could recede into the background.  We welcome your questions and concerns in the months ahead.  Enjoy a real summer with family and friends!  Stay safe and healthy. 

Thomas L. Menzel, CFP®                                             Laura Biermann, CFP®
President                                                                       Vice President

IMPORTANT DISCLOSURES:  The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.  Information obtained from sources is considered reliable but is not verified.  The research and other information provided herein speak only as of its date.  We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information.  Performance information presented is not an indication of future results and index data is provided for market reference purposes only.  This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy.  This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed.  This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy.  This material is for educational purposes only.  Mis-transmission is not intended to waive confidentiality or privilege.

[1] Reuters: https://www.reuters.com/business/feds-kashkari-says-inflation-will-be-temporary-workers-will-return-2021-06-25

[2] Marketplace: Once upon a time, inflation really was high, Sarah Gardner Sep. 18, 2014