Monthly Market Commentary

June 1st, 2021


Philip Blancato, Chief Market Strategist, Advisor Group

Inflation and its effect on monetary policy decisions is dominating headlines as investors grapple with its potential impact on asset prices. One of the most widely reported measures of inflation in the U.S is the Consumer Price Index (CPI). The CPI looks at the percentage change in the weighted average price of all the goods/services in the given basket over a given period. The CPI in May jumped 5% year-over-year, the biggest one-year inflation spike since 2008. In part, these instances of record high inflation measures are a repercussion from last year’s tumultuous market environment which suppressed inflationary pressures. Conversely, the monetary policy acts by the Fed keeping short-term interest rates near zero, coupled with vast amounts of fiscal policy aid in the form of stimulus payments directly to Americans, may have led to a buildup in inflationary pressures. While inflation has reached a 13-year high, the Federal Reserve has sent signals to the market that the rise in prices is ‘largely reflecting transitory factors,’1 as they believe that supply chain constraints are short term in nature.

As the Federal government moved to alleviate the stress of the pandemic through record fiscal policy efforts, Americans have saved at a rate significantly higher than historical averages, with the savings rate reaching upwards of 14.9% in April 2021 and even as high as 33.7% in March 2020. With too much money chasing too few goods, price increases were expected. It is not uncommon to have sharp declines in the CPI as the economy heads into a recession, followed by sharp increases as the economy begins to expand again. This is what we are seeing right now, with the CPI recently eclipsing the highest readings since 2008-2009, as shown in the graph below2. Like the Great Recession, we have seen the Fed take comparable action by keeping interest rates near zero, as well as introducing asset purchasing programs (purchase of securities by the Fed in the open market) to keep the economy afloat.

The Federal Reserve does not appear ready to raise interest rates to combat rising inflation until further substantial progress has been made on the employment front. The U.S. labor force participation rate remains well below prepandemic levels, and additionally, working age adults in the United States are voluntarily leaving their jobs at the highest rate in the past two decades3 . Ultimately, labor shortages are resulting in lack of supply as companies struggle to find workers to produce the goods and services needed to keep up with increased consumer demand.

Increasing price pressures along the supply chain have the potential to drive input prices higher, subsequently affecting
the bottom line of companies in sectors with less pricing power, such as consumer discretionary businesses. Companies that tend to perform best during periods of inflation are those that can successfully pass through their increasing costs to the end consumer.

With inflation running high year-over-year, the Federal Reserve may be forced to use their policy tools to shift the short end of the yield curve. The Fed Funds rate is one of many inputs in determining a discount rate for the valuation of a company’s securities, and JUNE 2021
IMPACT OF INFLATION IN 2021 Philip Blancato, Chief Market Strategist, Advisor Group MARKET ANALYSIS as that rate increases, the discount rate will increase, resulting in lower present values for those companies. However, moderate inflation (1%-2%) can benefit equities. Inflation near the 1%-2% mark signals positive economic growth and should be a tailwind for companies to continue to grow their earnings. When inflation is low and close to 0%, the risk of a deflationary environment can turn into a negative cycle for equities and the economy. What investors have now become concerned with is the potential for sustained inflation above 4%. Since 1957, U.S inflation has been recorded over 4% nine times, and in eight instances equities were lower within the next three months. The lone exception was in 2005, when inflation quickly returned below 4%, calming investors.5 Using history as a guide, we believe that inflation poses the greatest risk for stocks if it remains above 4% for an extended period; however, if inflation is transitory as the Fed has indicated, it should continue to be a positive environment for equities. For fixed income investments, increased yields mean that securities that have longer duration (risk associated with changes in the interest rate environment) will see greater loss of principal if rates do start to jump.

Therefore, we believe inflation is something to keep an eye on, but it is not time to hit the panic button just yet. As always, we would argue that having a diversified portfolio and strong risk management should allow investors to be prepared for the risk’s inflation may impose.

Economic Definitions

Job Openings – JOLTS: This concept tracks the number of specific job openings in an economy. Job vacancies generally include either newly created or unoccupied positions (or those that are about to become vacant) where an employer is taking specific actions to fill these positions.

CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

Quits Rate: The Quits rate tracks voluntary job separations initiated by the employee.

Savings Rate: Household saving is defined as household disposable income less household consumption.

Federal Funds Rate: The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.


Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates.

Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document.

Securities and investment advisory services are offered through the firms: FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc., a broker-dealer and member of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by FSC Securities Corporation, Royal Alliance Associates, Inc., SagePoint Financial, Inc., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., and affiliated registered investment adviser. Advisor Group, Inc. is an affiliate of these firms. [23505793]

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