Question: Knowing that you were recently in Chicago to meet with money managers, would you share some of the highlights and observations from those meetings?
Answer: Not only is Chicago home to many top portfolio managers, it’s also known for delicious deep-dish pizza and cold winds blowing off Lake Michigan. The vibrant city didn’t disappoint in any of the three categories.
Several themes were apparent during the meetings; (1) there’s obviously a strong relationship between economic growth and corporate earnings, (2) inflation and interest rates are intertwined and interdependent, (3) technology and education are vital to economic growth, and (4) quality matters.Their meetings began with an agreement that the global economy is gathering momentum and we could be on the verge of a “disinflationary boom.” This new term describes economic growth with the absence of inflation. Rather than focus on trading and short-term fears or noise in the news, we discussed investing and longerterm trends and developments.
The Fed and other Central Banks have ceased or are slowing down on government bond purchases, a technique used during the Great Recession to push money into the economy. The process of unwinding QE or quantitative easing has begun with the Fed essentially pulling money out of the system. There is still over $2 trillion in excess bank reserves so we’re still a few years away from tight money policies.
Current Central Bank and Fed activity is like running a printing press in reverse or “unprinting” money. Economics 101 defines inflation as too many dollars chasing too few goods with a resulting rise in prices. It logically follows that fewer dollars equals less likelihood of inflation.
Demographics also influences inflation.
Retirees leaving the workforce create opportunities for younger workers. This places less wage inflation pressure in the economy. Retirees would then have less income and will likely depend on retirement savings to support their lifestyles. The challenge in some cases is to get pre-retirees to step aside, especially those who haven’t saved enough for their future.
Remember the overqualified baristas with MBAs and PhDs who made your grande, iced, sugar-free, vanilla latte with almond milk at your local coffee shop during the Great Recession? As the economy and job markets improve, many of these individuals are moving on to follow their true pursuits, launching them on a consumption path that will help economic growth. Meanwhile, training new employees means that some industries will see efficiencies decline while new workers come up to speed. We’re beginning to see slight increases in wages which is a good sign. Wage inflation occurs when pay scales rise to attract job applicants and retain qualified employees. We’re keeping an eye on this economic indicator but as of yet it is not roaring out of control.
The internet also helps to keeps inflation low. Today’s smart phones allow us to conduct instantaneous price comparisons on products. Merchants are therefore far less likely to casually inflate prices. Transparency resulting from technological advancements levels the playing field for consumers and dampens inflationary pressures. Technology also leads to increased efficiency and reduced costs for consumers and corporations. Lower production costs may keep inflation down while improving corporate cash flow and profit margins and is good news for the stock market.
Technology also changed the United
States role in geopolitics.
These changes alter the dynamics in the Middle East, as seen by recent activity with Saudi Arabia, Russia, Europe and China. As technology advances in all areas, obtaining proper education for the resulting career opportunities will be increasingly important.
An improving economy, global growth, relatively low inflation and muted interest rates equals a dull and reasonably sustainable recovery. It’s expected that the pick for new Fed Chairman, Jerome Powell, will stay the course. The cause of most recessions is bad judgment by the Fed. A misstep on their part could bring adverse results. Our group’s recommendation to the Fed and Central Banks is “Easy does it as you unwind the easy money policies.”
Finally, we discussed the difference between knowledge and wisdom. Today’s 24/7 news cycle provides immediate access to “urgent” news alerts with instantaneous access to abundant amounts of information which may or may not be meaningful knowledge. In contrast, wisdom is the synthesis of knowledge, experience and good judgment. The current economic and market environment could be rewarding for those who stay focused and plan accordingly.
Past performance does not guarantee future results. All investments are subject to risk. This information should not be construed as a recommendation of any investment strategy or product. Views expressed are the current opinion of the author and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. There is no assurance these trends will continue or that forecasts mentioned will occur.
“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, Vice President, Investments.
This article is provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. Call or email Darcie at 239-389-1041 or firstname.lastname@example.org with questions or suggestions for future columns. Visit her website: www.raymondjames.com/Darcie.