To say we are in unchartered territory, as far as the economy goes, is an understatement. The market’s initial reaction to the reality of the pandemic was to decline in a way that was anticipating deflation. Deflationary declines are a collapse in prices with little or no reprieve until a bottom is reached. The 1929-1932 bear market was a deflationary decline that made the Dow Industrials fall 89%! But the March decline stopped just where we were anticipating it should, given we were in the last stages of the “bump correction” we had been referring to for two years, and the internals reversed to suggest we had formed a lasting low. There really is no precedent for our current economic condition so one must rely on logic and intuition to guide our thinking and follow what the market is saying about the way forward.
Peter Lynch was a famous Fidelity Investments mutual fund manager that had great success in the late 1980’s. He was a big proponent of being observant of trends you see in your everyday life and researching how the trends might play out in the stock market. His specialty was retail and he was lucky that retail was the hot item during his tenure at Fidelity. Heeding his advice, we have been taking note of things we see in our, limited, daily interactions. Gary recently decided to buy a golf pushcart and noted that there were none for sale anywhere in the southeast, if not nationally. He was told they sold out in late March and manufacturers weren’t producing/shipping anymore because of supply chain disruptions due to the pandemic. A trip to the grocery store will show you shortages not because of hording, but because of manufacturers cutting back on production because of supply chain issues. Gary was listening to the NPR show “Marketplace” when they had a newsletter writer on that declared “Inflation Is Dead,” which is usually a sign that things are about to head the other way. The price of gold is breaking out to multi-year highs and treasury inflation protected securities (TIPS) are showing a high level of big money accumulation. We think this all leads to the possibility of an inflation shock occurring at some point during the coming economic recovery and we intend to account for this risk in our portfolios.
We hope you are still safe from Covid-19 and that you have a happy 4th of July.
Gary and Dianne
This report is provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance.
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