Just over halfway through 2021, it is clear we are witnessing growth and change perhaps most comparable to 1946, just after the end of World War II. While the massive shifts back then were generally in one direction, from war-time production and forced savings to peace-time expansion and unbridled consumption, there are many crosscurrents at present which introduce much uncertainty.
Looking at the big picture, following the first quarter’s spurt of 6.4% growth, the second quarter’s GDP growth came in at 6.5%, below expectations, and perhaps signaling that growth acceleration may be slowing. However, industrial production is over 16% higher than the pandemic lows, with room to grow. Consumer confidence, often an excellent leading indicator, is back to ebullient pre-Covid levels, with the index at 129; about where it was in 2019 and the late 1990s.
The spike in activity has naturally augmented discussions concerning inflation. During the worst periods of the pandemic, supply chain issues and heightened demand for certain products such as fresh food and cleaning supplies induced exaggerated price movements of those items. During reopening, spikes in demand of used cars, suburban housing, and things missed during Covid brought inflation to these sectors. Despite occasional monthly bumps, the 12-month trailing change in the Consumer Price Index was rarely more than 2% from 2008 until early this year. It rose above 5% the last few months. The question is whether this higher level of price inflation is transitory or more permanent.
Normally, such increases in prices and economic activity would lead to higher interest rates. Higher rates would naturally translate into lower bond prices; the higher borrowing costs would reduce economic prospects; and these reduced prospects and the greater discounting of future earnings would knock down stock prices. Though things are normalizing, things are still not near normal. In addition to an uncertain course for future interest rates, equity markets could struggle due to market valuation metrics, which are above historical norms. Still, interest rates remain well below historic norms, and thus prospects for accelerating economic activity and higher than normal equity valuations should be expected.
In the meantime, the continuing problems that concern policy makers, inspiring both fiscal stimulus and low rates, are best reflected in jobs figures. The unemployment rate rose last month to 5.9%, and it has been stubbornly close to 6% all year. Compared to pre-Covid levels, there are six million fewer full-time workers and two million fewer part-timers; this while the population rose by about two million. Reopening has been uneven, and the recent surge in infections due to the Delta variant of Covid will probably heighten the uneven nature of recovery while also inducing continuance of growth-friendly policies.
Investing is a long-term process; the prospects and uncertainties highlighted above are best addressed by maintaining the asset allocation you are most comfortable with and rebalancing to that target when changes cause a portfolio to get out of line.