September 1st, 2021
Client Portfolios are still growing, but the path forward is not as easy as the past 6 months.
5-Year S&P500 Chart
Why might the market chart for 2021-2022 end up resembling a sawtooth?
The stock market follows a cocktail of consumer confidence and available liquidity over time. However, since the start of COVID lockdowns in early 2020, confidence has plummeted while the markets (and liquidity) have soared.
Let’s review the scene…
Confidence & Liquidity
Mind the (Confidence) Gap
Consumer confidence plunged and has not rebounded, but the market has soared…
Since the onset of Covid, the Fed has pumped up the money supply by over 25% — now a 5-fold increase since 2000
Asset owners win, wage earners lose
The rich get richer
Rather than help workers with higher wages, this money, arguably much more than necessary, has largely landed in stock portfolios and housing prices. Housing prices have not even tripled since 2000… so they haven’t kept up!
Free money has its limits
While the wealthy get to see their portfolios triple, workers got a cumulative 44% raise since 2000.
The combination of which has made new homes unaffordable…
While asset owners have experienced an exponential growth of wealth, workers are left behind. This, compounded with 17 months of school closures, a presidential election, and work-from-home policies not suitable for blue-collar workers, creates a recipe for social change:
Money for nothing?
Against this backdrop, politicians must raise the debt ceiling to continue paying America’s bills. It creates concerns about the debt ceiling and how much money can realistically be given away for votes. And what will the tax ramifications be?…
Unfortunately for policymakers and politicians, all this extra money simply seems to be finding its way into the pockets of the rich. And they are finding that Federal Reserve can only do so much – they cannot close the skills gap or fix the opioid issue.
In fact, politicians may soon find they are only antagonizing broader pushback against current spending policies…
Some inside the Federal Reserve understand this, among many other distortions their behavior has caused:
The Impending Liquidity Hangover
Back to our original two data points — a reduction of liquidity is coming. The rate of liquidity growth has already begun to decline rapidly:
Therefore, the stage is set for:
- A less generous government fiscal policy,
- A less generous liquidity backdrop, and
- Less ebullient financial markets
As a result, we will need to be thoughtful about making more conservative allocations than we did in the first half of this year.
(Sources: Ycharts, S&P, and the Federal Reserve)
This information should not be relied upon as investment advice, research, or a recommendation by jhh wealth, llc regarding (i) funds, (ii) the use of suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisors know enough about their circumstances to make an investment decision.
The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.