Advisor Insights Market Commentary Market News

Elephant in the Room

Written by: Benjamin Bimson CIMA®, CMT® / CIO, BCJ Financial Group

There seems to be an elephant in the room.

With so much stimulus, and more being discussed by congress and President Biden, it is no wonder there are concerns coming up regarding inflation. Will the inflation monster rear its ugly head to the extent that it becomes a real headwind? We simply cannot answer that definitively. However, there are things we can look at to see if that is the most likely outcome from all the stimulus, both existing and proposed.

According to Ned Davis Research (NDR) charts, stimulus is the largest their data has captured. The sheer amount of expansionary policy is staggering. Compared to the financial crisis, it looks like roughly twice the amount of stimulus. Below is a chart that shows both gold prices as well as policy. Gold prices are often followed as it is illustrative of market attitude towards expectations regarding inflation. Historically, gold prices have risen as inflation expectations have gone up.

The COVID crisis response has certainly been a historical event. It has also been a global event affecting the entire world. While inflationary pressure is rising, there are still some offsetting data as well. According to Bureau of Labor Statistics, at the end of January 2021, we still had a stubbornly high unemployment rate of 6.325%. For at least those unemployed, direct stimulus payments are more likely to be used to offset lost wages and earnings than simply apply maximum inflationary leavers.

Higher unemployment can offset massive stimulus when excess disposable income is not extremely elevated. According to the data from Department of Commerce, real disposable income minus transfer receipts is lower than average. This can be seen in the following chart.

As counter intuitive, despite the truly spectacular stimulus, it is possible that inflation will not bite yet to those who have not had to stop working during this pandemic, and that includes many stock market investors. Inflation, though expected to rise, likely will not get to a point in 2021 where it is a headwind to corporate growth.

While it sounds like a “goldilocks” situation, this is not necessarily implying that there are not risks to the current environment. With many unknowns as to when we really will return to anything resembling “normal,” there are significant political, social, and economic risks, and still so many unknowns. However, the risk of fear of not having something to fear can also be real. It is rarely profitable to allow yourself to make investment decisions based on hyperbole or feeling.

As we continue through this adventure of a year, we will continue to monitor the data and provide insights to help bring grounding to investment decisions. So far, it looks like we are having a “goldilocks” outcome. However, time will prove that to be an illusion or reality.

Investment Advisory Services offered through BCJ Capital Management LLC., an (SEC) Registered Investment Adviser.

Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 21-20

View More Articles

Advisor-Insights


Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein.  BCJ FG 21-12

NDR Disclosures

You Might Also Like