Americans know that their daily expenses are rising: Staple food costs have been on the rise for months, gas prices are up 20 cents in a month and more than $1.20 from a year ago, and Many government inflation benchmarks are reaching levels not seen in years or even decades.
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Some prominent economic voices have weighed in lately with their concerns. Twitter co-founder Jack Dorsey issued a grim prediction recently: “Hyperinflation is going to change everything. It’s happening,” he tweeted Friday night.
larry summers, who was treasury secretary and white house adviser in the clinton administration, was less concise but more direct: “we are in more danger than during my career of losing control of inflation in the united states” , he told a virtual conference this month, criticizing what he characterized as “a generation of central bankers defining themselves by their awakening” in Western economies.
Reading: Why is the stock market so high
both treasury secretary janet yellen and federal reserve board chairman jerome powell have recently said they expect inflation to last longer than was assumed a few months ago. In an interview with CNN on Sunday, Yellen said inflation is likely to remain above the optimal level until the second half of next year. She specifically refuted Summers’ warning, saying, “It’s something that they’re obviously worried about and concerned about, but we haven’t lost control.”
powell said in a virtual conference on Friday that “longer and more persistent bottlenecks” in the supply chain are creating more serious bottlenecks than lawmakers had anticipated, prompting them to consider a wider range wide range of economic results.
While buyers may worry, however, investors seem undeterred. Inflation warnings aside, the stock market has continued on an upward trajectory. Both the Dow Jones Industrial Average and the S&P 500 hit record highs last week and resumed their upward march on Monday. Main Street may be digging deeper into its pockets, but Wall Street is buoyant.
“The market is probably saying it’s probably not as dire as the more extreme calls from pundits or policymakers,” said Ross Mayfield, an investment strategy analyst at Baird. “Many inflation metrics are elevated, but they don’t indicate hyperinflation, for sure.”
Sean Bandazian, investment analyst at Cornerstone Wealth, said: “Hyperinflation like that of the 1970s is problematic… this is very different from the 1970s, when high levels of inflation were combined with a slowing growth and high unemployment — that’s a problem. we’ve got temporary supply issues — and still a ton of demand — and we’ve got 10 million job openings. we don’t necessarily see inflation and a 1990s economic regime coming 1970”.
Some market watchers attribute the rise in stocks to the long-lasting low interest rate environment, which they say is prompting investors to seek returns in equities rather than low-yielding bonds. “They’re taking money out of fixed income and putting it into riskier assets. That’s what we’re seeing happening behind the scenes,” said Darren Schuringa, chief executive officer of asymmetric ETFs. “Investors have nowhere to turn.”
bandazian said: “what would be more problematic for the stock market is a kind of hyperinflationary regime where the federal reserve has to act fast to raise interest rates, [but] high inflation is not necessarily a death wish for stocks as a fact, deflation is usually worse”. Sectors like energy and financial services, she said, often benefit when inflation picks up a bit.
Investment professionals said that despite the shock Americans may feel at the gas pump or the supermarket meat counter, the combination of rising wages, a high savings rate and Lower revolving debt has cushioned the most painful impacts of rising prices. “People have saved a lot of money,” said Schuringa. “The consumer is not the problem…individual balance sheets are not in bad shape, nor are corporate balance sheets in very bad shape.”
and the tight labor market has been driving up wages, especially at the lower end of the income spectrum.
“One of the things that has followed headline inflation up is wages,” said rob haworth, senior investment strategist at u.s. bank asset management. “On one hand, yes, we’re seeing concerns about headline inflation, but consumers still have ample room to maintain or increase spending.”
As a result, corporate earnings have largely held up, some even more than expected, and markets love a surprise to the upside. “They’re seeing good earnings in the third quarter…Margins really haven’t been hit to the extent that many people expected, with wage increases and goods costs rising,” said Dustin Thackeray, partner and chief investment officer at crewe. advisers.
Companies have been able to keep their profits high by passing on cost increases to customers. the question is to what extent they can continue to raise prices without seeing sales fall. “At some point, that can backfire on companies if they’re too aggressive,” Thackeray said. “There’s certainly a line where consumers say, ‘no more.’ “
haworth said: “they really think they have pricing power at this point. they’re able to raise prices without hurting their unit sales growth. if we saw consumer spending falter… that would hurt earnings growth” and dampen investor enthusiasm.
The trajectory of the coronavirus pandemic also remains a wild card. experts say that the coronavirus, although better controlled now than a year ago, could still negatively affect the economy, precisely because it is no longer the center of attention.
“I think a large global Covid shock causing economies to shut down would cause another market correction, because that is no longer entrenched,” said schuringa. “an increase in covid, especially with vaccines, I think that would bring down the markets.”