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Market Update September 2: Battle Flation

Market Update September 2: Battle Flation

September 09, 2020
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Did you catch the most recent GWS market update? Our discussion centered around COVID-19 death rates, the effect of politics on the market, and inflation. Check out the highlights below, and watch for the recording to be posted soon!

A new CDC report shows that only 6% of COVID-19 deaths in the United States were attributed solely to the virus.

Ninety-four percent of COVID-19 deaths had contributing conditions, meaning 9,210 Americans have passed away from COVID-19 alone. The risk of dying from the virus is actually very low if you’re under age 65 and free of underlying medical conditions. This does not mean the virus did not cause additional deaths, but rather that it is just the "straw that broke the camel’s back."

The Department of Justice is suing Michigan, New Jersey, and New York regarding the deaths in long term care facilities. These states’ governors have been very critical of the current administration.

In addition, the announcement was made during the same week as the Republican National Convention (RNC).

It appears the RNC was more successful than the Democratic National Convention (DNC). The RNC had the advantage of going second; however, it appears the Democrats are being associated with the riots and lawlessness and the Republicans are better positioning themselves as the “law-and-order” party. This has resulted in a surge in polling to favor the Republicans out of the convention. Expect to see Joe Biden being more vocal and positioning himself as hard on crime, too. Also, it appears there is a shake up within the party factions, with divisions moving toward a rural vs. urban party system.

COVID-19, the Republican National Convention, and the Democratic National Convention all have an impact on inflation within our economy. 

The Four Ds of Inflation

One of the risks we continue to bring up each week is the market’s inflation risk. Morgan Stanley’s 4 Ds of inflationcould drive the future economic cycle in the United States:

  • Demographics
  • De-Globalization
  • Deficits
  • Dollar Debasement

Here’s why these factors so acutely impact inflation rates.

Demographics

Baby Boomers are just now starting to retire. Because they are past family formation years and already have most of their possessions, Boomers’ consumption will likely decrease. Meanwhile, their entitlements, such as health care, will create deficits.

Millennials are just starting to approach age 40. They should have an increase in consumption, as they are a larger demographic than the Baby Boomers at this time. Millennials are already in family formation mode. This contributes to the inflationary trend, because this group is starting to build and buy larger and more expensive houses.

De-Globalization

With globalization there was deflation, but as the trend gets reversed, inflation occurs.  Supply chain disruption began the discussion of onshoring — the practice of transferring busines operation that was moved overseas back to its original location — meaning more factories need to be built. But the strength of the dollar has helped check price inflation.

COVID-19 has ultimately sped up the process of de-globalization. This is a benefit to many small-cap and mid-cap U.S. businesses contributing to consumer price inflation.

Deficits

Deficits are no mystery or surprise during this worldwide pandemic. They continue to explode as COVID-19 disrupts our world. Fiscal stimulus is more focused on individuals and/or small businesses, unlike the financial crisis of 2008.With direct cash payments to consumers, consumption is more than likely to increase. Also, because the Feds are buying the government debt, deficits are clearly inflationary.

Dollar Debasement

When the amount a dollar is worth increases, products in the United States become cheaper relative to other countries. Eventually, this decreases the value of the dollar. The more the Feds apply stimulus, the more they drive the United States dollar debasement.

Technology is Deflationary

Technology has created a massive deflation for economic goods. While we have this inflationary risk, there is also a huge deflationary pressure that we have been going through for the past 20 years. The more we become dependent on technology, the more the production of the overall economy is going to reflect Moore’s law.

Follow GWS on YouTube

For the full video recap of the webinar on which this blog post is based, follow GWS on YouTube. (If a recent episode isn’t posted there yet, it’s still in compliance review). And be sure to tune in to our weekly Gatewood Wealth Solutions Market Webinar to hear updates on the current state of the market and economy. As always, we welcome you to share our broadcast links on social media or with your friends and family. They are more than welcome to listen in and learn our perspective on the market and the economy. 

If you have any questions, please contact your Lead Advisor or any other member of our team.  We are here for you.

Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

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