Is inflation here to stay or just transitory? The answer will determine the direction of the stock markets, the bond markets, and the economy.
The last several years have been traumatic. First was the COVID-19 pandemic. Our government ballooned the Federal Deficit through huge injections of cash due to the lockdown. Once COVID was contained, it left Americans with cash in their pockets and a shortage of goods to buy. Inflation exploded.
Then Russia brutally invaded their neighbor. The human toll is heartbreaking. The carnage and resulting sanctions spiked oil and gas prices worldwide. Furthermore, this summer we will see how much inflation will result from the lack of food and fertilizer exported from this region.
Lastly, China’s No-COVID lockdowns are severely limiting manufacturing and consumer goods exported to us, further driving prices higher.
The question then: Is inflation here to stay or just transitory? If inflation normalizes it will support growth stock prices (see last month’s Chartbook) and the overall stock markets. Receding inflation will stop interest rate increases which will support bond prices and stabilize the economy.
These events are temporary. Most of COVID is behind us, the cash injections from our government are stopping, and China will get back to exporting. And hopefully, there is a resolution in Ukraine coming for humanities sake.
We at WST remain optimistic, but watchful as events unfold over the next several months. As always, we are focused on the long-term fundamentals and aware of shorter-term volatility.
-Cliff Jarvis