Happy 4th of July! As we come together as a country to celebrate the 245th “birthday” of this great nation, hopefully you are able to be with friends and family this year. It has been so exciting to see the reopening of our country with people getting back to living their lives again. With the spread of vaccinations, many countries around the world are now following our lead. It looks like we will even have the Tokyo Olympics to watch this summer.
We have been talking for months about what this will look like once the “world” reopens, and this past quarter has been a good indication of what is to come. Modern day technology and the use of the internet allowed us to remain virtually connected last year, as well as being able to purchase goods. This year it is becoming all about experiences. Travel is back in a big way whether by plane or car; Americans are hitting the road in record numbers, TSA is now checking 2 million plus air travelers through security most days, hotels are back above 60% occupancy rates, restaurants have waiting lists for dine-in guests. We can even get out and enjoy a professional sports game or attend a concert or movie. It is very interesting that one year ago, it was a real challenge to imagine how this was all going to end. Now all we here about is how inflation is on the horizon and we are heading back to the ‘70’s again (I will touch on this later).
Americans have accumulated cash like never before in our history. With Covid restrictions around the country last year, we spent less money and saved more. Collectively Americans saved an additional $2 trillion last year and now have over $14 trillion in cash, bank checking and savings. In addition, home prices in the U.S. have risen significantly creating another $1.5 trillion of equity. This, along with equity market increases since March of last year, has pushed U.S. household net-worth to a record $136.9 trillion. This wealth affect is so important when it comes to future consumer spending. There is a belief this post-Covid expansion will last well into 2022. Consumers have money to spend, and although there have been supply constraints, businesses will work through these logistical issues.
What are the implications for U.S. equity markets that are currently at all-time highs? Many of the companies that thrived during the pandemic, like Apple, Amazon, FB, are now priced at levels that will make it challenging for those stocks going forward. These are still great companies, but they have become overvalued in our eyes. The real opportunity is in the companies that saw their sales decline sharply during the pandemic. These are the businesses that did not participate in the big stock market rally last year (ex. Energy, Financials, Travel & Leisure). These are the sectors that have led the stock market rally since last fall as these businesses have begun to see a real recovery and should benefit from the reopening of the economy.
The concern about inflation has become a big topic of conversation. If we go back and look at price increases from 2019 (pre-Covid) to this year, inflation is running about 2.5%, which is just above the Federal Reserve Banks target rate of 2%. It appears that we will have higher inflation on certain items in high demand this year, though I believe we will see this pricing pressure begin to ease as global supply chains and manufacturing get back to more normal operations. Many of the shortages we are now experiencing (chips for car manufacturers), have a lot to do with the fact that these very companies canceled orders back in 2020 at the height of Covid. One of the great things about Capitalism, is businesses are incentivized to get products into the hands of consumers. This will lead to multi-national firms diversifying their operations globally. There has been a heavy reliance on manufacturers in China and that is changing after the Covid pandemic. This will bring some manufacturing back to the U.S, more than likely though, countries like Mexico will be big beneficiaries of this change.
This is an exciting time for us here at Heritage as we are celebrating our 20th year in business. There is never enough space for me to cover all the topics I would like in this newsletter, so if you would like to hear more on my thoughts, please watch the attached quarterly video. If you have any specific questions not covered here, please let us know.
Brett Carleton, CFP®, ChFC