Stocks, Inflation, & Risk
Greetings, July 2021 marks the ninth consecutive month of gains for the stock market as measured by the S&P 500 index. This is in line with our commentary last month that the market is simply melting up - even in the face of two persistent threats to the post-pandemic recovery. Those threats are 1) the delta variant and 2) rising prices for consumer goods and services, commonly known as inflation. Many of you have approached me about any changes we may make to our investment strategy considering these risks. These questions provide an excellent opportunity to revisit two underpinnings of stock market investing – risk vs. return and inflation.
Risk vs. Return: Through July, the stock market has returned roughly 18% this year vs. the average 1 year bank CD returning less than 1%. The reason the stock market has outperformed your local bank is risk. While never guaranteed, the relationship between risk and return is proportional. The more risk you take, the higher return you stand to make. This is where the risk of the COVID-19 delta variant comes into play. The threat of a return to early 2020 pandemic shutdowns due to a resurgent virus is the kind of headline risk the stock market loves to reward investors for taking on.
Inflation: Since the Great Recession ended in early 2009, investors have had to deal with the looming specter of inflation. Back then, the idea of rescuing the economy through lower interest rates fueled speculation of a 1980s style hyperinflation cycle. The problem for investors is that they have to hear this repeatedly in our ever-expanding 24-hour news cycle, but they shouldn’t fear inflation. Why? Inflation is the reason investors invest in the first place.
Historically, the prices of every good and service have gone up over time.
For example, a cup of coffee cost $0.75 thirty years ago. Today that same cup costs $1.50 on average. That’s a 100% increase. This means that your income had to at least double during the same period to maintain your coffee habit. Not only that, but any money you had saved would also need to double in value to keep up with the costs of inflation.
Banks can’t pay you enough money to outpace inflation, your business may do the trick, but most people don’t own a business, and while the value of your home does go up over time, the only way to get money out of your home is to sell it or take a loan against it.
This leaves the stock market as the most liquid and accessible option for protecting the buying power of your money. Thirty years ago, a $1 investment in Nike, McDonald’s, and Disney returned $265, $50, and $25, respectively. These returns easily outpaced the rising costs of a cup of coffee over the same period. This is one of the overlooked reasons we invest. Yes, it is to build wealth. Yes, to have money for retirement. But we also invest to preserve the buying power of our money.
In summary, risk and inflation have always been a part of the investing experience. However, if we invest and stay the course, our money will keep up and, in most cases, outpace the inflation rate. This doesn’t mean that the market won’t take a dive as inflation numbers and COVID-19 cases spike, but should this occur, don’t fear the dip, but instead use sound investing principles such as rebalancing and asset allocation to take advantage of lower prices.
If you have any questions about how inflation and resurging COVID-19 cases may affect your portfolio, please give your Wilson Wealth investment advisor representative a call.
Maurice L. Wilson
Advisor Representative, Wilson Wealth