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


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).