Inflation Is Here – Weakening Consumer Confidence

The economy and stock markets have exhibited growth not seen in decades. 

Gross Domestic Product “GDP” is expected to be up 10% (6-7% excluding inflation).  Corporate earnings are expected to increase 24% over 2019 (pre-pandemic) and 10% in 2022.  The stock market is up 15% so far this year reflecting strong earnings growth. While the economy remains strong by historical measures, its growth is showing signs of abating somewhat.  According to The Conference Board, consumer confidence declined in August 2021 for the second consecutive month.  We believe inflationary price increases in gasoline, food, and housing; along with a rise in COVID19 cases contribute to the decline in consumer confidence.  The U.S. economy added 235,000 jobs in August, well below the 735,000 forecast and the 586,000-monthly average in 2021.  With 10.1 million jobs posted and unfilled, there is no shortage of jobs for the 8.4 million reported as unemployed and seeking work. Once the federal government’s additional unemployment compensation program comes to an end at the end of September and COVID cases decline, we expect monthly job growth will return to the 600,000 to 800,000 range.

Inflation data is capturing the headlines with inflation currently running at 5.4%, well above the Federal Reserve Board (FED) 2.0% target. 

Loose monetary policy, extraordinarily high government spending and several supply constraints are contributing to the current rise in inflation. If inflation persists, stocks, real estate, and commodities tend to rise with inflation; thereby providing a hedge against inflation. However, the stock market would likely decline initially due to contracting valuation (P/E).  Stocks eventually recover as revenue and earnings rise due to inflation. Cash and long maturity fixed income investments would erode in value in an inflationary environment.

As always, there are risks to both the stock and bond markets.  

If tax policy shifts to inhibit the free flow of capital, business investment would slow.  Investment capital is the fuel for job creation as new technologies unfold and, if constrained, economic activity and employment would be negatively affected. The stock market is currently trading at 22.5x 2021 earnings and 20.6x 2022, well higher than its 16.0x historical average. While stock markets’ P/E ratio could remain at an elevated level, stock markets could face a meaningful decline if interest rates rise faster than the muted forecast suggests.

Richard S. Lawrence, CFA / September 2, 2021

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!

Why Do Investors Short Stocks?

Why do investors short stocks? “Shorting’ stocks is a strategy to profit from a decline of a stock’s price. Investors use this strategy to “hedge” an investment portfolio, profit from a decline of a stock’s price, or to lock-in the value of a stock without selling the stock.

Example of shorting a stock:

Stock Ticker: SHRT
Current Price: $25
Hypothetical (A) Future Price: $30
Hypothetical (B) Future Price: $20

Investor shorts stock “SHRT” at $25:

Investor borrows 1,000 shares of SHRT from a financial firm having custody of shares in street name. Investor sells the borrowed 1,000 shares SHRT and receives $25,000 cash into investor account. Investor “covers” short position by buying the 1,000 shares of SHRT and returns the borrowed shares to the financial firm which lent the shares. The “lending” firm charges interest on the shares being borrowed also called “margin debt”.

Two Scenarios:

  1. SHRT price declines to $20/shareInvestor buys 1,000 shares at $20 in the open market at a cost of $20,000. Investor delivers the previously borrowed 1,000 shares back to the lender.  Investor profits $5,000.
  2. SHRT price increase to $30/share: Investor buys 1,000 shares at $30 in the open market at a cost of $30,000. Investor delivers the previously borrowed 1,000 shares back to the lender.  Investor loses $5,000.

A “Short squeeze”

 A short squeeze occurs when an investor (usually an institution with a large short position) scrambles to buy shares as a stock’s price is rising.  If the stock is illiquid the price may rise rapidly as sellers become reluctant to sell. The short seller is “squeezed” and must pay higher prices for the stock as the investor attempts to “cover” their short position.

Shorting is used to reduce a portfolios overall market exposure, thereby reducing the portfolio risk profile.

One very useful use of this hedging technique is to defer a capital gain. If an investor owns “ABC” at $50 per share with a $10 cost basis, the investor will incur a $40/share capital gain if sold.  If the investor would like to “lock-in” the $50 value but not sell the stock until a future date, the investor could short ABC. If ABC increases to $55 the investor would gain $5 from ABC long position, and lose $5 from the short position.  Conversely, if ABC declines by $5 per share, the ABC holding would decline by $5 and the investor would profit $5 from the short position. The investor would incur the borrowing cost relating to the short position.

While shorting is an excellent hedging technique, the risk is unlimited. Shorting should only be done by investors well informed about the risks involved.

Note: Past performance is not an indicator of future results. Investors could lose money investing in the stock and bond markets, among other capital markets.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

Responsible Investing Performance

Our “Responsible Investing” stock portfolio, +25.5% in 2020, once again outperformed the S&P 500 Equal Weight Index.  The objective of this portfolio is to invest in stocks of companies with superior operating performance. These companies employ responsible policies in the areas of the environment, community and employees, and corporate governance.  This RI portfolio has performed well when markets are rising. It continues to exhibit excellent protection in down markets.  During the four-year period 2017 through 2020, our RI portfolio was up 89.5% in contrast to the S&P 500 Equal Weight Index up 47.9%, and the Dow Jones Industrial Index up 55.0%, all on a cumulative basis.

We made a few changes to the portfolio in January 2021.  We removed Cisco Systems Inc. “CSCO” and added Fiserv Inc “FISV” and Texas Instruments Inc. “TXN” to the portfolio.

Interest in Socially Responsible Investing “SRI” has gained popularity during the past five years and is now a part of many pension funds primary objectives.  Years ago, Responsible Investing portfolios primarily excluded stocks of companies operating in fossil fuels, tobacco, alcohol, and firearms to name a few.  SRI methodology has changed significantly and now has an inclusion methodology rather than exclusion.  Included are stocks of companies which employ responsible policies in the areas of environment, society, and corporate governance i.e. “ESG”.

We are pleased to offer the “Responsible Investing” stock portfolio to clients.  If interested in our Investment Management and Financial Planning services, please contact Rich Lawrence at 215-540-0896 or at rich@lawrencewealthmanagement.com.

Note: Past performance is not an indicator of future results. Investors could lose money investing in the stock and bond markets, among other capital markets.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES

9 Years and Counting

Lawrence Wealth Management is proud to announce that Rich Lawrence has been named a Five Star Professional Wealth Manager for the ninth consecutive year.

Founded in 2003, the Five Star award program is the largest and most widely published award program in North America, covering more than 45 major markets. Professionals recognized as award winners are published by Five Star Professional and its partners. Award winners cannot pay a fee to be included in the research or the final list of award recipients.

Beginning in 2012, Rich has been named a recipient of this prestigious award every year and 2020 marks his ninth year of this recognition. Learn more about the award and how Lawrence Wealth Management can help you by scheduling a consultation.

SCHEDULE A CONSULTATION

AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES