As virtually everybody was wondering what was going on with GameStop and Robinhood, and what the heck is short-selling etc., the bond market was doing what it normally does: giving us clues as to the future economic outlook. Of course, none of that bond market information is a guarantee, but we need to pay attention!
The yield (yield is another name for interest rate) curve for US Treasuries is steepening sharply. What that means is that the longer-term rates have risen quite a bit from their prior, recent levels. Specifically, as of the week ending February 5, 2021 the 10-year yield is at 1.17% and the 30-year yield is at 1.98%. It has not been so close to 2% in about a year. In the past, these types of rising long-term rates indicate that the bond market wizards expect stronger economic growth and higher inflation.
This is anticipated for several reasons:
- Massive spending is expected in the new administration. Of course, the COVID spending was also rather high (how is that for an understatement!).
- There is a perception that there is a lot of pent-up demand, which is expected to be unleashed once we can all get vaccinated.
- The Fed and other central banks put massive amounts of money into the world economy during the pandemic, which creates a large supply of money to be spent or saved.
- Many people are leaving the cities and/or wanting to live in a house of their own. With mortgage rates still very low, that dream is coming true for more people every day. New homes need new furniture, etc. By the way, median home prices are also up above year-earlier levels.
- Many new policies in the U.S., such as the national minimum wage and the new energy policy will likely cause an increase in expenses for many products and basic needs, like your heating, gasoline, etc.
All of the above will tend to lead us toward: INFLATION.
Simply put, price inflation means that prices go up from current levels. Currently, due to the previously mentioned government spending levels in the U.S., we are also seeing a decline in the value of the dollar. What does a person do about this as we look at a personal financial or retirement plan?
- First, make sure that you prepare a plan and include inflation in your calculations. If you have not done this, we can help you.
- Second, when you do the plan (or have us do it for you), it likely needs to contain some growth aspect so that you can keep pace with inflation. Of course, this needs to be carefully planned as we all know that what goes up, will at least occasionally come down.
- Third, some people are including traditional inflation hedges like gold and gold mining companies in their portfolios. Again, be careful regarding this, as holding too much of any asset can increase your risk. More importantly, remember that gold, like any other investment, will move up and down in price based on the value of the dollar, etc.
Inflation with economic growth is not a bad thing, but we must plan for it properly!
As always, we are here to help you stick to your long-term financial goals. Call us if you wish to discuss this further.
by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services