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With the Economy, We Take the Good With the Bad

When Federal Reserve Chairman Jerome Powell spoke to the Committee on Banking, Housing and Urban Development, on July 15, his Semiannual Monetary Policy Report comments were somewhat upbeat, signaling real progress in some areas.

Real gross domestic product – “This year appears to be on track to post its fastest rate of increase in decades.”

Household spending – “Rising at an especially rapid pace, boosted by strong fiscal support, accommodative financial conditions, and the reopening of the economy.”

Housing demand – “Remains very strong, and overall business investment is increasing at a solid pace.”

Labor demand – “Demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones.”

Four days later, the Dow Jones industrial average closed down 725.81 points, or nearly 2.1 percent, to 33,962.04 for its worst day of 2021.

The S&P 500 index skidded 68.67 points, nearly 1.6 percent, to settle at 4,258.49. The tech-heavy Nasdaq composite index shed 152.25 points, or nearly 1.1 percent, to close at 14,274.98.

“The Great Resignation”

Employers added 1.7 million workers from April through June. Powell said further job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish. Powell didn’t mention, however, further job gains include a lot of job “shifting” this time around.

The pandemic was the catalyst for people to take a step back and ask themselves if they want to stay in the jobs they are in. Many workers caught up in the daily grind said no. They wanted a change—and what better time to change than in a wide-open job market giving them so many viable choices.

So, workers quit their jobs and took their 401(k) plans with them in record numbers. Some decided to continue working from home in new jobs, while others happily took time off to contemplate new paths. Worker empowerment took hold.

In April alone, 4 million workers quit. In May, it was another 3.6 million. The incentives were clear: make more money, have more time off, integrate a mix of work-from home and in-office days, better health coverage, retirement packages and advancement opportunities. For those willing to wait it out, their job prospects looked better than ever. And employers were happy to hire them.

And then, Inflation Rears Its Ugly Head

What derailed the markets on July 19 was investor anxiety about a delta-led resurgence in coronavirus cases and inflation worries. Economists say today’s inflation is a direct result of the COVID-19 pandemic’s economic recovery, low interest rates set by the Federal Reserve, several rounds of direct government stimulus and pent-up consumer demand. But in consumers’ minds it’s never the right time for higher inflation.

Chairman Powell admits inflation has “increased notably” and will likely “remain elevated” in coming months before moderating. Consumer prices increased 5.4% in June from a year earlier, the biggest monthly gain since August 2008. Prices for services that were hard hit by the pandemic have jumped in recent months as demand has surged with the reopening of the economy.

Food and energy prices also were up substantially, 0.8% and 1.5% respectively. The gasoline index rose 2.5% in June and is up 45.1% over the past 12 months. Food has increased 2.4% in the past year.

A new job, more money and better benefits are exactly what you want when inflation is lower. Even with higher earnings, your new paycheck might not carry you any farther than your old paycheck did. At least not right now anyway. Buying food and goods on sale and in bulk really helps during times like these, consumer experts say.

Inflation surged more in June than it has in more than 10 years and price pressures have come from sectors particularly influenced by the shutdown of the economy — used car prices, airfares and transportation costs, just to name three. Certainly, the news has investors worried because rising prices can erode a portfolio’s profit. So what does inflation do to your portfolio?

Build in Your “Inflation Protection”

When you’re working, your earnings should keep pace with inflation. When you’re not working, and living off your savings due to a job layoff or retirement, inflation lessens your buying power. Your Hefren-Tillotson financial planner has factored inflation into your MASTERPLAN® to ensure you have enough assets to last you through your retirement years.

Fixed income securities such as bonds, treasuries and CDs, provide for a stable income stream. However, those interest payments are based on a rate of interest that never changes and remains the same until maturity. Purchasing power declines when inflation rises. Bond prices fall when inflation increases. The bond market’s 5-year inflation forecast is less than in mid-March.

Stocks have held up well against inflation over the last 30 years. Revenues and earnings should increase at a similar pace as inflation, as should the price of your stock and the general prices of consumer and producer goods.

Economists and other financial experts say the current rate of inflation is nothing to worry about because it is temporary and expected, even if it is unclear when it will eventually fade. Market drops will always be an issue. The real concern is keeping America open, running and healthy, unlike the first time.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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