This month: Technology, interest rates, inflation, construction costs, new “you know what” variant, market summary, age 72+ client mandatory RMD IRA withdrawals due in late December and MarketCycle’s 2021 charitable contribution goes to the Turpin children (from ABC’s ‘Escape From a House of Horror’).
I’ve heard it repeated a zillion times in articles, websites, financial channels and even from clients (and even today): “Inflation kills technology.” What they mean is that rising prices (inflation) and rising interest rates (via the Federal Reserve) will kill off the technology stock sector. This is the stock sector that has lead the stock market higher since 2009. My thesis for the past 13 years has been that technology stocks, over a total 20 year expanse of time, will lead the market higher, at least until 2029.
So, the question is this: “Will inflation murder technology?”
Our brief answer is: “No!”
As readers know, I like to use charts to prove my points. Charts are data made visable.
Inflation means that, wherever you might live, it takes more of your country’s currency to purchase an item than it took in the recent past. In the United States, the value of the USDollar has steadily fallen. In just the past two decades of printing and spending, if one would consider the Dollar worth 100 cents in the year 2000, then it would be worth only 60 cents today. It has lost 40% of its value in just two decades. If in the year 2000 you had parked $100,000 in a savings account paying close to 0%, then the value of your money has been reduced by 40% during this short period that had very low inflation; without spending a dime, you now have $60,000 and 20 wasted years. With the current rapidly rising inflation levels this is about to get much worse. This is why it is so important to actually INVEST your money because if you don’t, it eventually gets whittled down to nothing. The past 20 year loss of purchasing power has occured during a period when wages have not gone up for most people. (Chart courtesy of WolfStreet).
The loss in purchasing power results in inflation. Economists can only look at past economic data because of the time that it takes to collect & interpret the numbers & information. But MarketCycle’s proprietary indicators (not shown here) are designed to ACCELERATE data and our indicators suggest that inflation actually peaked in July of 2021 and that it has gyrated sideways ever since that date. We were likely the first to see inflation begin In March of 2020 and we are now one of the very few advisories currently suggesting that it has likely already peaked, although certain factors like housing costs which are just now showing up in the data, could make inflation move a bit higher again before heading lower to form a new base. Of note, the cost of construction, building new or remodeling old, has gone up 13.3% in just the past 12 months (year-over-year) and on an item as expensive as a house, this is an astronomical additional pocketbook hit. (Chart courtesy of CapitalSpectator):
Is high inflation harming stocks? Owning stocks represents nothing other than you having partial ownership of a corporation. Stocks and the economy are not the same things; despite rising costs (inflation), corporate profits are at multi-year highs. Profitable corporations = stock market goes up. (Chart courtesy of Charles Schwab)
INVESTING during inflationary periods…
According to Bloomberg Research, technology is, by far, the best sector to hold during inflationary periods:
According to the OECD, in a stock bull market, technology is the best sector to hold in an inflationary rising interest rate environment:
According to Fidelity Research, when nominal interest rate yields are up, the technology sector leads the way higher for the U.S. stock market:
We currently have to deal with a double-whammy. Interest rates are lower than at any time during the past 5000 years and this is at the very same time that we have entered an inflationary spike. My current thinking, and this might change, is that we will see 2-3 inflationary spikes (where each new bottom is higher than the last) before we enter the steadily inflationary decade of the 2030’s.
The markets go through repeating & long-lasting secular cycles that affect all financial assets. We see a prolonged period of inflation which is then followed by decades of deflation, and then inflation arrives all over again; it is like breathing in and then out and then in. And different assets perform best in each scenario. We just experienced 40 years of slow-motion deflation which will now be followed by many years of inflation (slow & stumbling at first, then steadily building). Even this universe that we live in experiences inflation (expansion) and it will then, eventually, experience deflation (contraction).
Inflationary cycles affect interest rate cycles. This next chart shows the past 5000 years of interest rate levels; we are now at record deflationary lows with inflation now having nowhere to go but higher. (Chart is courtesy of Bank of America Global Research):
The 40 year interest rate cycle hit its official bottom in March of 2020 and it is now turning around to run in the opposite direction. This next chart shows the past 200 years of just the United States interest rate levels. I expect the coming rate cycle peak to be much higher than it was in 1980 and for the final peak to occur in the mid-to-later 2030’s. (Chart is courtesy of Technical Research Advisors):
And right now? The Federal Reserve is always too late to act against inflation and this always causes an eventual recession. The key word is “eventual.” They very likely won’t raise interest rates until we’re well into 2022, but they are already at record negative real rates as inflation rises (per chart below). The last time that they raised interest rates (from 2016 to 2019) it took a full 39 months from the start of the rate increases to cause the recessionary bear market of March 2020. So, when they raise rates the stock market will not crash; it may not even pay much attention to it for years. And yes, technology stocks will continue to head higher. The concensus, including from Goldman Sachs, is for two rate hikes in 2022 and that ‘danger’ has already been priced into the stock market. (Chart courtesy of Bloomberg)
Our current high inflationary level is not likely to drift back down until mid-2022. This next chart shows that people are still buying everything that they can get their hands on; goods consumption remains 11% above trend, although it appears that it may have peaked (see the early-2021 peak in the dark blue line). Because of the pandemic, consumers couldn’t utilize as many consumer service providers (light blue line) because they couldn’t leave their houses. Since people feel that they must continually spend money, they shifted their spending away from consumer services and toward consumer goods. The couldn’t get their toenails painted, so they bought televisions. The resultant temporary empty shelves (from competition for fewer goods) resulted in our current & temporary inflation spike. Long term, out in the future, intractable high inflation will be caused by world governments continuing to spend money that they do not have… as if debt never has to be re-paid.
SUMMARY: In my continued opinion, U.S. technology stocks will lead the market higher for another 8 years. Almost everyone out there is pushing REITs (Real Estate Investment Trusts), regional bank stocks and energy stocks. I would add gold and TIPs to the mix (TIPS are Treasury-bonds that are protected from rising inflation). MarketCycle holds all of these assets in our portfolios, in one way or another, but we still love the U.S. technology sector.
Despite Friday’s pullback, the stock and commodity markets are still showing strength. Calculated recession probabilities 3 months out are still below 1%, which is incredibly bullish. Expected GDP is @ 5.5%, which is incredibly bullish. BUT MarketCycle’s proprietary indicators are hinting at a Spring(?) of 2022 pullback of perhaps 10-15% and we’re watching everything closely and we plan to hedge accounts ahead of the event.
Consumer spending has been pushing the economy higher but that is now about to (slowly) rotate toward corporations pushing the economy higher as they become flush with new infrastructure cash. And all but 5 countries on the planet are in expansionary mode, which is incredibly bullish.
I tend to look at things from a longer-term perspective. When I state in this monthly article that bonds or crypto-currencies or inflation will likely soon drop, I may not mean next week; I likely mean in less than six months. At my age and with the way that my mind works, time takes on a different meaning. This current inflation spike will likely not last, but that does not mean that it will end next week; it still has some tailwinds behind it. The Fed could stop inflation today merely by raising rates sufficiently, but they always act too late because of their fear of damaging the stock market. Our indicators, which accelerates the very same data at which they look, shows that they should move sooner rather than later. They should make their move soon, but they won’t.
I’d repeatedly written that, this Fall, we would touch the upper trend channel with the S&P-500 hitting somewhere between 4600 and 4700 and that the market would then slightly pull back. That event happened at 4650. Most recently (in a Client Market Update) I said that stocks would pull back in late November; they did that on Friday 26th with the Dow’s 900 point drop. It could go somewhat lower in the near-term, but I don’t think by much. I used Friday’s opportunity to put additional new client money to work when the Dow was down roughly 1100 points in early morning trading. My target for before the end of 2021 has been at 4800 (we almost touched that the other day), and although I expect to see one bigger market pullback during the spring or possibly the early summer, we could still see the S&P-500 @ 5400 by the end of 2022. It is difficult to stop a charging bull.
The new variant (and yet another chance for me to upset people): I wrote a blog on this topic several months ago and it is still available on the website. Some loved it, some ignored it, some hated it, two (now-ex) blog readers threatened me. What people need to know about me is that I have a lot of information crammed into my brain and that I never say anything unless I know it to be either true or to be very likely true. So, the new variant fulfills everything stated in the blog: more contagious, much less lethal (we are slowly approaching a level where it will not be too different from the common flu), it likely by-passes the vaccine and, most importantly, it might have the ability to use the RNA vaccine to make itself more contagious (all of this is covered in that blog). This virus, just like what the common-cold corona-virus did many years ago, is slowly becoming both permanent and weaker… and just another part of what comprises our daily lives.
2021 IRA RMD: In December, United States’ clients age 72 and older must take their 2021 RMD withdrawal out of any IRA retirement account (but not ROTHS) that MarketCycle holds. There are RMD calculators online and all you need to know is what your account balance was on the last day of 2020 & your birth-date and then go to your online MarketCycle/IB account, click on Transfer Funds, Withdraw, Wire, USD, Amount. I need to be notified first in order to make sure that there is a sufficient cash balance in your account before withdrawal but my plan is to raise the cash in these accounts by December 20th. December may be a strong month, so there is no rush.
2021 CHARITY… MarketCycle Wealth Management’s 2021 CHARITABLE CONTRIBUTION: In the name of our clients, we normally give a fairly large donation to a charity that protects ecosystems or that builds playgrounds in poor communities, etc. This year we’re going to take a different turn. If you saw the Diane Sawyer ABC Special on the Turpin siblings (Escape From a House of Horror), you would know the story about 13 siblings that were systematically starved, tortured, caged, choked & beaten, chained and kept in a constant condition of pervasive filth by their psychopathic parents for their entire childhood until the oldest female child escaped at the age of 17. She had been taught that if she ever tried to escape, then the people living outside of her house would kill her. The night of her brave escape, with no neighbors awake to help her, she eventually talked to a police officer, who was the first real human outside of her brothers and sisters that she had ever spoken to. Totally uneducated, she didn’t even know how to correctly pronounce the words that she was speaking: “siblings” became “sib-lingahs.” She and her sisters & brothers were saved that night by some very kind police officers. A Go-Fund-Me page was set up where it accumulated a large sum of money and they were put into Foster Care homes. Apparently, social workers then stole all of their Go-Fund-Me money and the foster care families decided that it was now their turn to beat, abuse and starve them. Literally nobody checked on the kids either before or after their escape. With Diane Sawyer’s help, they are now in good foster care homes and a real funding source has been set up for them. How do 13 children come out of a situation like that and then just show nothing but innocent kindness and love toward others? You can see the two older girls in the photo above; you can also see their parents who are now both serving life-term sentences in prison. So, long story short, before Christmas I will write a check earmarked for the Taupin kids and send it to the jaycfoundation.org. I plan to follow through with more money at a later date. I want to thank our clients for this privilege since it is basically a chunk of the management fee that we collect.
Thanks for reading!
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