The impact of bottlenecks along with inflation across the entire supply chain – manufacturing, logistics (shipping) and labor – continue to test the mettle of investors, this as the Fed embarks on what will most likely be a period of more restrictive monetary policy, first by tapering their purchases of mortgage-backed securities and U.S. Treasuries and then, or coinciding with, actual increases in interest rates.
On Wednesday, the U.S. Bureau of Labor Statistics released December data regarding inflation at the retail level as measured by the Consumer Price Index (CPI). This reported a 0.5% rise in the CPI for December and a 7.0% rise for all of 2021, the latter of which represented the fastest rate of inflation since 1982. That year represents the culmination of a period of stagflation which then Fed Chair Paul Volcker choked off via a series of rate hikes, which in turn induced a short, but nasty recession.
On Thursday, inflation at the wholesale level as measured by the Producer Price Index (PPI) rose 0.2% during December and by 9.7% during 2021, led higher by energy prices (31.4% y/y) and food prices (12.9% y/y). Once again, this represents the fastest pace of inflation since this series began in 2010.
As a result of the above as well as an Unemployment Rate of 3.9% which has historically indicated full employment, the tone of the Fed has turned quite hawkish, partially in an effort to “talk down” demand and therefore inflation and partially in an effort to give investors ample warning that higher interest rates are coming. Speaking in front of a congressional panel recently, Fed Chair Powell noted that “the economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation.”
Powell then vowed to “prevent higher inflation from becoming entrenched.”
The above does not need to be interpreted negatively as between 2004 and 2006, the Fed hiked rates 17 times, raising the Fed Funds rate from 1.00% to 5.25%. However, after an initial bout of volatility stocks moved higher with the S&P 500 returning an average of 8.45% over those three calendar years.
At this time, after an expected period of volatility which we expect to last for most of the first half of 2022, we expect markets to settle down a bit and value to have emerged in secular growers. It is a difficult job and runs counter to human behavioral patterns; however during these times it is important to focus on your objectives and extend your time horizon. Keep in mind that many times stress causes one to focus on the short-term which often comes at the expense of long-term benefits.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.
