About Last Week's Inflated American Headlines
Hey everyone, and welcome to issue #053 of the abroaden weekly insights newsletter! This one will be slightly different as we're back in session at the incubator and are pressed for time. Enjoying what you're reading? Get that sweet, sweet social cred by sharing on your favorite platform!
The US markets and why you shouldn't worry about inflation.
If you looked at the news last week, you probably noticed that the US economy went kind of nuts.
It's essential to understand what happened because it was both predictive and blown out of proportion.
Here we go.
The stock market's wild ride
Stock markets are always volatile; it's their nature.
Last week was a reminder that what goes up can and does sometimes go down.
The week started with a big sell-off on the markets; it's biggest in three months.
Investors began to worry about inflation (more on that below), causing them to sell what we call "growth stocks.:
Growth stocks are shares of companies that reinvest profits instead of paying dividends.
The idea is that these investments will offer a big pay-off one day.
Holding onto them should net a solid return as they grow.
By the end of the week, though, stocks recovered almost all of their losses.
There were a couple of factors driving this trend.
WTF is this Inflation noise?
At the beginning of the week, monthly economic data came out from the Federal Reserve.
Inflation was the report's star, showing the economy inflating 4.2% compared to twelve months ago.
This news appears terrible on the surface.
Central bankers like to keep the economic hot tub at a warm 2% inflation rate.
When that rate more than doubles, investors freak out.
Lower jobs report and record openings
Next, the US Bureau of labor statistics reported the monthly job figures for April.
Economists of all shapes and sizes were predicting almost 1 million new jobs created last month.
When the report dropped, so too did the jaws of investors.
The US economy created "only" 266,000 new jobs.
Immediately, people began to dig into the root cause.
The debate soon focused on the extended unemployment benefits tied to the pandemic stimulus.
At its core lay this fundamental question: "Are these generous payments of 300 USD a week keeping people from working?"
Just two days later, some more surprising jobs news came out.
The American economy has 8 million more job positions open than available workers.
Companies are begging people to come to work for them.
Desperate businesses are raising salaries and doling out hefty signing bonuses.
Investors again expressed their conflicting viewpoints on the stock markets.
End of restrictions Economic comeback
By the end of the week, the American Centers for Disease Control announced a significant milestone:
No more masks and social distancing for vaccinated people.
This watershed moment means many people will be able to resume normal economic activity.
When it happens, consumers will shift to services ("instagrammable moments") instead of goods.
Investors like this news, even if it means shifting out of some stocks and into others.
Oh, and that pipeline problem.
Also, the US gas pipeline shutdown we talked about last week sent people scrambling for the pump.
It turns out we learned nothing from last year's toilet paper panic.
(Investors didn't care about this one. Still, it was a classic example of our love of irrational behavior).
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What you can do about all of this to not get sucked into the hype.
First and foremost, this time last year, most economists and financial people were predicting this activity would happen.
It's no secret that people have tons of cash and pent-up demand to have fun after a year of pandemic savings.
With restrictions easing, people feel more comfortable and are spending the money they saved.
Prices will go up, which is normal.
However, remember that:
- Much of the savings came from being stuck at home, government assistance, or both. Those represent one-time payments; not everyone receiving a pay raise at the same time.
- Some inflation is good right now. We borrowed tons of money at near rock-bottom rates. Inflation raises interest rates, which will make those loans we gave ourselves free.
- Raised interest rates can have some positive impacts. It lowers the cost of buying a house (as home prices go up as mortgage rates go down). It also gives us different places to invest our money.
Many investors ignored these realities and went with their gut.
You shouldn't do that, because…
Second, Not timing the market is key to being a successful long-term investor.
Many people panic-sold their holdings as inflation fears inflated.
Decisions like that define irrationality.
Wise long-term investors put their emotions in check and stick to their plan.
It's not easy (and some platforms can help you), but it's the absolute secret to investment success.
Finally, we're getting a glimpse of the future, and it's looking bright.
The United States is a few months ahead of us here on the continent.
Our vaccination campaign will continue to pick up speed with any luck, and we'll get back to normal by the end of summer.
When that happens, we could see the same story play out.
We definitely should be looking forward to that.