Covid down, inflation up. As the CDC has lessened restrictions on those who are vaccinated, there has been a rise in inflation.

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If this is your first time tuning in, I’m Eric Powell, the founder of RightPlan Financial (and or The Future Mill). Let’s dive in and take a look at what has happened this past month relating to the stock market and discuss what we are doing for client portfolios.

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Inflation has been a discussion for some time and now the talk isn’t if inflation will happen, but how long it will last. Some analyst predict inflation to be short lived as we continue down the road of economic recovery, while other analyst project inflation to continue long-term.

As inflation creeps, the economy continues to show growth. A May 28th report on personal consumption expenditures, which excludes food and fuel, increased by .7%. This jump beat expectations and is the biggest one-month advance since October 2001.

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With the concerns of inflation, investors tend to resort to the stock market with a goal of growth to hedge against rising costs. This does not fare as well for bonds and conservative portfolios, especially due to low rates. At some point the Fed will have to raise rates, causing current bonds to take more of a hit than they already have for the year. As I have mentioned before, bonds rates being raised makes the bonds held less attractive because people now want the new bonds with higher rates.

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While there is concern of raising rates with bonds, the stock market has continued to grow and many are wondering if and when we start saying the B word, which many remember all too well in the early 2000s with tech stocks and again in 2008. If you’re still stuck on when I said B word, that word I am referencing is BUBBLE. One of the ways to slow the economy a bit to prevent a bubble is for the fed to raise rates. The concern with the rate raise is this will not only cause the bond market to take a hit, it will also make banks pay more for their money, which trickles down to corporations and consumers paying more. When this happens, the economy slows a bit and stock prices tend to slow their rapid growth.

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This situation is new to all since nobody has ever seen Fed rates this low with an economy that has overall performed so well. We did see the economy take a brief hit from March 2020 until now, but the overall economy has been on a steady rebound since 2009, without having a significant brake tap by the Feds.

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Though what I mentioned has a lot of financial lingo, the basic breakdown is that at some point the Feds will be forced to raise rates and this could affect both stock and bond prices. Now before you think cash is where you should be, you must remember that inflation will hurt the value of your dollar and we must keep a long-term mindset. The overall goal is for the fed to slowly raise rates at some point to keep the economy in check and not allow inflation to run out of control. You have to remember that growth is good, but unhealthy growth is dangerous.

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As I had mentioned previously, some analysts are predicting the rise in inflation to be short term and the fed has not yet given the slightest hint at a rate raise. The biggest way to combat the scenario is to continue to remain diversified and make sure your portfolios are aligned with your long-term goals. For client portfolios, we have multiple funds to provide diversification in each industry. With more conservative portfolios, we also have incorporated funds that participate in the stock market, though they are what the industry calls hedged. These funds allow for growth up to a limit, though they also provide some downside protection as well.

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For those who watched or read the update from last month, you may remember that I discussed cryptocurrency and shared some of the risks associated. If you have been or started to follow the crypto industry, you may have noticed one of most well know coins, Bitcoin, falling about 50% during the month. A lot of the downturn was due to China regulations and the founder of Tesla, Elon Musk, tweeting how the coin uses too much energy. Elon’s tweet reversed his original statement of how Tesla would accept Bitcoin as a form of payment for their vehicles. I say that in hopes that you did not catch the high if you bought in, but also to be sure if you buy these coins, you buy with money that is not needed to meet your short and long-term financial goals. It is a highly risky investment that could yield a large profit, though the potential for loss is quite high as well.

For the stock market May numbers, the S&P 500 index was +.4%, Dow Jones Industrial Average was +1.9%, Nasdaq Composite -1.53%, Barclays US Aggregate Bond +.33%, Barclays US Corporate High Yield +.3% and Barclays Municipal +.3%

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Thank you taking the time to watch. If you have any questions, please reach out.

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