Supply Chain Stoppage
During the COVID-19 global lockdown, supply chains around the world halted overnight. Conex boxes (or shipping containers — pictured above) can only be moved on and off a boat one at a time. You can imagine how this immediately created supply chain bottlenecks that only compounded over time.
Already, the U.S. is not only back to pre-lockdown import numbers but 20% higher. Our exports have decreased, and we've added ships. This created physical bottlenecks at ports because there is only so much ship volume one port can handle. The same issue happened to railways and airlines and an abundance of volume without enough infrastructure to support it.
The Country Re-Opens
During the height of the lockdown, American's spending on service-oriented industries — such as restaurants, hair salons, etc. — completely halted. Instead, we brought in more essential, tangible goods, which led to an increase in imports.
Now, as the United States opens up, we'll shift our spending money back to service-related industries, thus decreasing the demand for imports.
You might hear the Federal Reserve use the word "transitory" to describe inflation — suggesting it will be short-lived before bouncing back. But it's unlikely that many of these commodity prices will ever reverse back to pre-pandemic levels. And we are going to see other waves of inflation, such as federal policy tariffs. Just recently, the U.S. government announced they would double the tariffs on softwood imports coming in from Canada. Pre-pandemic, a thousand feet of lumber cost $396. Now, that number is up to $1,700.
Where Should I Invest Now?
When considering how to invest your money in an economic environment like this one, it's helpful to prioritize preserving not your principle but your purchasing power. In other words, it's essential to consider your investments in the context of inflation.
So, let's look at current stock risk. Looking at the data set above, you'll see stocks are riskier than bonds. However, that's not to say that you shouldn't have bonds or you shouldn't have cash. If you have a one- to three-year horizon, you should insulate some of that risk by holding the money you need during that time.
What Is the Effective Funds Rate?
If you want to become and remain financially self-reliant, it's going to be stocks that get you there. Just consider 1802-2013 in the graph below, where you'll see a pronounced real return after inflation.
Stocks have performed at 6.6% long-term, while bonds only made it to 3.5%. A few sub-periods to include:
1802-1870: No big central bank moved the interest rate; it was more market-determined. We can see the bonds during that period paid 4.8% versus stocks' 6.7%.
1871-1925: We see stocks at 6.6% and bonds at 3.7%. State-sponsored banks were helping keep interest rates lower in each condition, so bonds were suppressed.
1926-2013: The Central Bank was established and quickly started increasing the money supply. This decreased interest rates, so bonds have not been able to keep up with the same types of return.
In the post-World War II periods of 1946-1965, bonds went to -1.2%, and stocks were at 10%. In the 60s to 80s, you see high inflation with no real return. Looking at the effect of the federal funds rate in the 1960s, you can see interest rates were low, similar to where they are now. Now, we wait and see if history will repeat itself — while keeping a finger on the pulse of the economy and market movement so that you can make informed decisions about your money.
Stock investing includes risks, including fluctuating prices and loss of principal.
Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
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 directly.
Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.