As prices for consumer goods continue to escalate, more people are taking notice of this infamous inflation spike. It’s common knowledge that a slow increase in inflation is inevitable as the Federal Reserve makes up for increased demand and production costs of consumer goods. However, inflation has surpassed expectations this year, and investors are rightfully concerned about how this will affect the future of the stock market. To make a financially sound decision about your current positions in the market, we analyzed the current inflation rate and stock market trends below:
Inflation in 2021:
As a result of businesses beginning to reopen earlier this year, the demand for consumer goods is much higher than the supply. Consequently, according to (Gilbert & Gillum, 2021), “the Fed recently acknowledged it had missed the mark inflation expectations, upgrading its preferred core inflation forecast for 2021 from 2.2% to 3.0%” (para. 4). The jump is significant. However, because of the lockdowns and market crash caused by the pandemic last year, it isn’t surprising.
Will there be a stock market sell off?:
Stock valuations were high as many entered 2021 with economic optimism. The increase in vaccinations and decreased COVID-19 cases led many investors to believe that the stock market would reach all-time highs, of which it did. According to Sonenshine (2021), “the average forward price/earnings ratio on the S&P 500 recently was above 21 times” (para. 5). Therefore, there doesn’t seem to be much more room for growth, and with the rising concern over inflation rates, this can lead to the narrative of a potential stock market sell off. However, we also have to factor in the unprecedented times. Due to government stimulus and extreme demand, many growth companies are more flush with cash than ever before. This higher cash to debt ratio, tends to make the companies more valuable on the balance sheets. This likely is part of the reason markets like the S&P 500 index continue to rise.
Should you sell your investments in fears of inflation?:
The decision to “Sell” your investments is always subject to a variety of factors; age, liquidity needs, current investment allocations etc. We always recommend you work directly with your financial advisor on these decisions to analyze all of the factors. However, in general, inflation does not always lead to downward performance. Many value companies actually perform better in higher inflation environments. The key to inflation is understanding the potential risks/returns of your portfolio allocations, and consistently monitoring them to make swift changes when necessary. Also, searching for opportunities in rising inflation environments, can potentially lead to above average performance.
Our Approach to inflation at U-Vest® Financial
Inflation has been a timely subject of discussion regarding the stock market. Understandably so, many investors are worried when they see their stocks drop dramatically after updates from the Fed and headlines from the media. Here at U-Vest®, we encourage all of our clients to do their best to use a logical, data driven, approach when managing their investments instead of allowing their emotions to take hold. If managing your investments is becoming overwhelming, our licensed financial advisors are here to assist you.Our team of advisors manage active portfolios, on a discretionary basis, in which we are consistently looking for opportunities in the marketplace. We have all different advisory portfolio options, that we can tailor to your investment goals and most importantly take on the stress of investment management for you.
- Gilbert, B., & Lawrence, G. (2021, June 21). Inflation And What the Fed Is Saying. LPL Research. https://www.lpl.com/news-media/research-insights/weekly-market-commentary/us-inflation-what-fed-is-saying.html.
- Sonenshine, J. (2021, May 19). Why Is the Stock Market Falling? Here Are 3 Reasons. https://www.barrons.com/articles/why-is-the-stock-market-falling-here-are-3-reasons-51621435990.
This article is meant to be general in nature and is not intended, and should not be construed as personal advice of any kind. Please consult your financial advisor prior to making financial decisions. Michael P. Davino, CFP® is a Financial Advisor with U-Vest Financial®, a separate entity from LPL Financial and can be reached at 850.300.7055. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
Investing involves risk including the potential for loss of principal.