Marshall Commentary

We understand that financial planning isn’t always top of mind – but it is for us! Each month we publish a commentary to update you on the latest financial trends and changes.

Wealth IQ – June 2021

by Adam Reinert, George Evans II, & Sean Dann | June 30, 2021 | Commentary

Marshall Wealth IQ is aimed at sharing insightful financial market and economic data in easy to visualize charts with brief analyses. This commentary isn’t designed as a call to investment action, but rather as a dependable source to help you feel better informed about current events in today’s market and the underlying trends impacting current wealth.

Let’s get started:

1) If Google activity is any indication, inflation seems to be the early leader for ‘economic term of the year’. Notably, the two recent peaks in Google searches for inflation both align with release dates of Consumer Price Index (CPI) data – likely the result of increased media and social media coverage fueling public interest.

Source: Google Trends, U.S. Bureau of Labor Statistics
2) Casual market observers may be surprised to learn that inflation-sensitive assets, such as bonds, have had little reaction to recent CPI data. Part of the reason – bond prices adjusted earlier this year in anticipation of above-average inflation readings this summer. Capital markets typically try to ‘price’ future expectations into current prices.
Source: Google Trends, YCharts
3) Economist anticipation of recent inflation data can largely be explained by what economists are calling ‘base effects’ and ‘bottlenecks’. We’ll use the price of oil to demonstrate a base effect change. Energy prices have been one of the largest contributors to the recent increases in CPI data. This doesn’t mean the price of oil is soaring to new heights; rather, it’s more reflective of just how low last year’s prices were. In the chart below, we can observe how significantly the price of oil declined during the pandemic and how quickly it recovered. The year-over-year percentage change in oil is large, but that’s really a function of rising from a depressed price. As year-over-year time periods move out from last year’s low prices, the base number should rise, making future year-over-year price changes appear more ‘normal’.

4) The second contributor to recent inflation changes has been ‘bottlenecks’, as seen in the used car market. A number of pandemic-related challenges have temporarily impacted the car market, including production shut-downs and subsequent employment levels, consumer preference for driving vs. mass transit, and inventory shortages. A number of issues have impacted inventory shortages, from supply disruptions delaying the production of new cars, to car rental companies purchasing used cars for their fleets (in the past these companies were typically a net supplier of used vehicles). Many of these challenges are likely temporary disruptions, and recent data of the wholesale vehicle market shows used vehicle pricing may have already peaked.

Manheim US Used Vehicle Value Index Year-Over-Year % Change

Source: Bloomberg
5) Economist forecasts, as compiled by Bloomberg, continue to express the view that inflation will peak in the second half of this year as price distortions from ‘base effects’ and ‘bottlenecks’ resolve.
Source: Bloomberg
6) Over recent history, inflation rates have seen many peaks and valleys but remain far from the exceptionally high inflation experienced in the 1980’s.
7) Coincidentally, there seems to be an increasing narrative that cryptoassets now serve as a form of digital gold. While it’s true that both gold or cryptoassets are relatively independent of any ‘central authority’, in our opinion, we have yet to see behavior to support the claim that cryptoassets act as a store of value, at least not during the most recent inflation changes.
Source: YCharts

8) Cryptoassets are likely here to stay and the underlying blockchain technology has many practical uses. While some investors may truly own cryptoassets for the technology, we believe the more common narrative surrounding investor interest is that of a speculative asset – meaning investors purchase them with the objective of making money. Given the volatility of the asset class, in the near term, the type of investors who are likely to have the best experience are those who have the risk appetite to stomach large price movements and the ability to absorb losses with minimal impact on their financial lives.

9) Stock markets have continued to perform well this year. One emerging trend that may impact near-term market performance is narrowing market breadth – or the number of companies pushing stock indices to new highs. Recently, a decreasing number of companies have been driving positive market performance. While this certainly isn’t an uncommon occurrence, it can make the market susceptible to some short-term volatility as fewer companies contribute to market gains.

10) Perhaps more meaningful for investors is since last summer, market multiples, a gauge of how expensive valuations are, have continued to come down even as the S&P 500 has reached new highs. A full recovery in corporate earnings from 2020 lows has been a major contributor to this and a positive development to observe.

S&P 500 Forward P/E

S&P 500 Forward Earnings

11) While a more formal introduction will follow, we’re happy to welcome Sean Dann to the Marshall investment team. Sean is a recent graduate of the University of Notre Dame. Over the prior two summers, Sean has done exceptional work with us as an intern and we’re excited to have him join us full-time.

It’s impossible for anyone to know with certainty what will happen today, tomorrow, or even a minute from now. Investment involves risk and volatility; it’s why long-term investors have historically been rewarded with excess returns relative to cash. Our investment department monitors market data and works with our wealth advisory teams to right-size portfolios should something change relative to long-term trends. In the meantime, we’ll continue to share financial and economic data we believe is insightful and relevant to your wealth to help you feel informed.

Thank you for reading; please be well and stay healthy.

Adam Reinert, CFA, CFP®

Chief Investment Officer

George Evans II, MBA

Chief Investment Strategist 

Sean Dann

Research Analyst

Disclosure: Marshall Financial Group, Inc (“Marshall Financial”) is an SEC-registered investment adviser with its principal place of business in Doylestown, Pennsylvania.   This newsletter is limited to the dissemination of general information pertaining to Marshall Financial Group’s investment advisory services.  Investing involves risk, including risk of loss.

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