The Pendulum Swings

“The everyday cares and duties, which men call drudgery, are the weights and counterpoises of the clock of time, giving its pendulum a true vibration and its hand a regular motion; and when they cease to hang upon its wheels, the pendulum no longer swings, the clock stands still.”

~ Henry Wadsworth Longfellow (1807 – 1882), American Poet. 

Question: As the economy reopens, what are our thoughts on immunity, inflation, and infrastructure? 

Answer: It’s hard to believe that it was only one year ago that we were in the midst of the pandemic shutdowns, cancellations and travel restrictions filling the headlines. In other words, fear and uncertainty were top-of-mind issues for many. Fast forward to today, and we’re singing a vastly different tune as we’ve watched markets trend upward in response to several factors. Greater immunity due to vaccinations, inflation resulting from stimulus money along with pent-up demand for goods and services, and infrastructure spending on the table provide fuel for future growth opportunities. This robust rebound also brought volatility along for the ride with talk of the Federal Reserve tapering future asset purchases is now in the headlines. It’s widely believed that inflation pressures will be transitory as we gradually return to some sort of normalcy. 

Yet questions remain regarding immunity as we hear about the efficacy against COVID-19 variants and the possible need for booster shots as well as how cooler weather may influence the spread of various viruses. Meanwhile, the Consumer Price Index (CPI) rose a healthy 4.2% year-over-year in April, some of which is attributed to bottleneck pressures as the economy restarts. A few examples are the lack of workers in many sectors and a specific backlog in building materials, semiconductor chips impacting consumer electronics and car manufacturing. The delay between ordering and receiving semiconductor chips is at a record high of 17 weeks. U.S. Commerce Secretary Gina Raimondo proposed $52 billion in funding to boost semiconductor production and research, which could lead to as many as ten new facilities. This is a critical step for the United States since our market share of semiconductor production has decreased to 12% from 37% in 1990. Major commodities such as lumber, steel, and aluminum are beginning to recede from their respective recent peaks by 21%, 17% and 6% which is a hopeful sign that some bottlenecks are easing. If this trend continues, it may alleviate some of the inflationary pressure we’re experiencing in some sectors.

Stimulus money brought about a unique situation to the labor market as we now attempt to reopen our economy and bring workers back to their jobs. There is lag time and the Fed is waiting for labor market improvements to naturally occur before raising short-term interest rates to curb inflation. The outlook for economic growth remains strong, but labor market frictions are likely to be more intense than in a typical recovery. The pendulum will swing and find balance over time. 

The definition of what actually is infrastructure and how to pay for it are the talk of the town in Washington D.C. As this is being written, we’re lacking any clarity and bipartisan negotiations remain deadlocked. It’s likely that we’ll have a summer of debate followed by a deal this fall, thought to be in the $2-$3 trillion range with pared-back adjustments to corporate and capital gains rates, suggests Raymond James Washington Policy Analyst Ed Mills. 

As we reopen the economy, supply chain bottlenecks and materials shortages are expected. They are more intense than usual now given the speed of economic recovery, prompted by fiscal stimulus and the rapid distribution of vaccines. Supply chains should improve over time, but current labor force issues may not be resolved quickly and could add to inflation expectations.  

The bottom line

The economic recovery remains robust, with added momentum from fiscal and monetary support. Rising inflation and volatility remain concerns, however the positives outweigh the potential negatives. Pullbacks and volatility are to be expected in the normal course of investing, especially during times of economic recovery. As has been the case over past economic cycles, the cure for higher prices is higher prices. Manufacturers and sellers are naturally inclined to produce more goods and provide services at higher prices in response to increased demand; until they’re not. The self-correcting actions that history has shown will likely occur, albeit at a different pace than we are accustomed to seeing due to the unique nature of the global economic events and forces that influence behaviors. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of June 6, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Economic and market conditions are subject to change. The Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Raymond James does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional. 

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This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.