Mid Quarter Client Investment Update

COVID Ripples, A Sustained Labor Market Shortage, and Surplus Consumer/Corporate Cash

While the pandemic appears to be past its peak damage, it is obvious that it continues to impact everyday life. The repercussions are global and, though diminishing in more developed countries, COVID-19’s wake continues to send ripples and force changes in all areas such as education, healthcare, energy, business production and transportation to name a few.

The Labor Shortage Remains the Biggest Threat to Growth

The metamorphosis underway in the labor market is evident by a widespread shortage of workers in all segments of the economy. Employment growth that is weak has significant impact on our economy. Unless technology and other methods are employed to increase productivity, less employees results in less production and, when demand for products exceeds the supply, prices rise until supply and demand come into balance.

We had expected the widespread availability of vaccines and the expiration of expanded unemployment supplements to improve the labor situation which, to date, has not yet occurred. There are still 4.2 million fewer employees today compared to February 2020. How quickly we can regain full employment has major implications for economic growth, inflation, and monetary policy.

Two thirds of those leaving the workforce are over age 55, and a significant number of lost employees will not return to their former job; they are either retiring, working remotely and/or in a hybrid manner, or starting their own business. This may continue when you consider that we are only in the middle of the Baby Boomers reaching full retirement age for Social Security (born between 1946 to1964 – now aged 57 to 75).

Other factors reducing the workforce are the strains of caring for elderly parents, children, and grandchildren in a changed world. Nursing homes, childcare facilities, and work environments that were safe pre-pandemic may now be vulnerable environments. Heightened financial stimulus has also reduced the incentive to regain employment for some. The mix of these factors has reduced the prime age (25-54) labor force by 1.7 million since the start of the pandemic, though we expect a majority of this decline to reverse.

Investment Update and Outlook

The economy in 2020 produced painful headwinds for consumers, as well as massive strains on businesses being forced to cease operations and cut expenses to survive. With the economy facing increased unemployment, poverty, and the prospect of personal and business bankruptcies, our central bank and federal government provided enormous financial assistance, which continues to this day.

This government assistance, combined with the liquidity injected into the economy by the Fed, and the Fed’s continued suppression of interest rates, provided major support for our wounded economy. Though this aid continues, much has changed in 2021. Consumers, who sheltered for more than a year, saved enormous amounts of funds – estimated at a record $2.7 trillion.

At the same time, businesses that survived got lean and piled up cash as they maneuvered an uncertain business environment. Even with supply chains issues, raw material inflation, and a labor shortage, large businesses are reporting record profits and expanding margins.

We Expect Inflation Pressures to Ease

Inflation will need to be monitored as a Fed pivot from fighting unemployment to fighting inflation would be a rude awakening and something the market has not experienced in over a decade. Our expectation is for inflation to cool as supply chains heal and labor markets expand leaving the economy on a strong footing as consumers spend a large chunk of their savings. This backdrop produces a strong environment for corporate profits – the key determinant for long-term equity returns.

Conclusion

Stocks remain the asset of choice as they continue to benefit from government largesse, sound consumer and business financials, and technological progress at increasingly rapid rates to the benefit of all.