You may have noticed news items on November 10 about the Consumer Price Index rising by 0.9% for the month of October and posting a 6.2% increase over the last 12 months. This is probably not a surprise if you have been to a grocery store or a gas station lately. Inflation is back.
If you are like me, I can remember the 1970s. At that time inflation was significant (double digits for most of the decade) and economic growth was slow. They called it stagflation.
It does not look like we are heading into a replay of the 1970s just yet. The signals are conflicted. Specifically:
- Inflation is higher than it’s been in 30 years.
- Interest rates are extremely low. As of this writing, the 10-year Treasury bond is paying about 1.4% interest. This is historically low. The bond market does not seem to believe in inflation.
- Gold, which is often seen as a hedge against inflation, is no higher than a year ago. So, the gold bugs don’t seem to believe in inflation.
- The U.S. dollar is at a 16-month high. The currency market does not seem to believe in inflation.
Inflation is Why We Own Common Stocks
Meanwhile, the use stock market as measured by the S&P 500 index is up about 24% for the year. So, if your cost of living is up 6%, your investments are up about four times that. This is why we own stocks.
Regular readers know how much I love context, so let’s put the recent inflation data in context.
The last time inflation was at six percent for 12 months was 1990. This was just 10 years after the end of the stagflation era. The media was just as excited about inflation then as they are now.
How does 1990 compare to today?
- The S&P 500 ended 1990 (a recession year, with war in the Gulf just days away) at 330.22. At the current S&P level of around 4,650, it’s up 14 times.
- Cash dividends of the S&P 500, which is what retired equity investors often use to pay for groceries and gas, was at $12.09 in 1990. Data from Bloomberg shows that for the full year 2021 it will be about $61. So, equity income is up five times.
- The Consumer Price Index in December of 1990 stood at 133.8. This October, based on the most recent report, it was 276.6. So, the cost of living has barely doubled.
In summary:
- U.S. stocks up in value 14 times since the last 12-month CPI increase of six percent.
- Cash income from stocks up five times.
- Cost of living up merely twice.
Over time, stocks grow faster than the rate of inflation. Therefore, money you have saved for a future goal will buy MORE in the future than it did on the day you saved it. This is why we own stocks for the long run.
You might wonder if stocks can continue to grow as they have in the past. It’s a good question. Generally, I believe that they can because I believe in the U.S. economy. I believe in the resilience and creativity of business owners in this country.
I also believe that nobody knows what coming next for U.S. stocks. And as a great example of this, I ask you to think back to December 5, 1996. That’s the day that Federal Reserve Chairman Alan Greenspan made his famous statement about “irrational exuberance” in the investment markets. He warned of a coming market correction. And he was right, but it took more than three years. It was about 40 months later, on 24 March 2000 that the S&P 500 index hit its peak and began a three-year decline.
And, by the way, $10,000 invested on December 1, 1996 in the S&P 500 is now worth about $109,000. The S&P 500 has grown at a rate of 9.634% each year with dividends reinvested over that time. A friendly reminder, this time period includes six bear markets (declines of more than 10% from the last peak) including two historic market corrections (2000 to 2002 and 2007 to 2009) that were each the deepest since the 1930s. This is why we own stocks for the long run.
So, what to do about inflation? I suggest you turn off the TV, log off the computer, pick up a good book and don’t think about the stock market for a while. Let stocks do what stocks do best, compound faster than inflation to build wealth for your future goals.
If you have questions about inflation, stocks, and your financial goals, I would love to talk with you about all that. Follow this LINK to find a time for us to visit.
I’m a financial planner who is always an advocate for my clients – a fiduciary advisor. I’ve been doing this for 20 years and I have great training as a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
Is the advisor always the client’s advocate – a fiduciary advisor?
Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.