The first quarter of 2021 did not disappoint. Equities (stocks) had one of the best first halves of the year in the history of the market. This usually bodes well for the remainder of the year. Going back in time, if the first half of the year is strong, approximately 80% of the time the second half of the year seems to follow suit. I would not be surprised to see double digit returns in our portfolios by year’s end. There are a number of issues that could have an impact on our accounts over the next six months.
Inflation, or the cost of living, has spiked in recent months. The government reported that in May, inflation was running at 5% year over year for the first time since 2008. To give you some perspective, the average inflation rate over the last thirty years has been approximately 2.5%. Inflation is caused by the amount of money chasing goods and services. If there is more money chasing goods and services than there are goods being produced, the cost of everything goes up. In a nutshell, inflation is a tax. It devalues our currency. All the stimulus money handed out recently is a perfect example. Fewer goods produced due to the pandemic and trillions of dollars handed out by the government chasing those goods. I agree with the Fed. I think inflation by and large is transitory but there are going to be some goods that will remain high. Energy is one of them, unless some policies are changed. Your portfolio is impacted because a lot of the free money was invested in the stock market which can artificially inflate stock prices. There will come a time when the market corrects and the sugar high from all the stimulus will have to trade to fundamentals. This does not appear to be in the near future but is definitely something we are watching very closely. If you have money in accounts that do not have the ability to earn at least 2 to 5%, chances are, you are losing purchasing power.
We are keeping an eye on crypto currencies. We have very little exposure to them at this point. In my opinion, if you want to invest in cryptos, it has to be money you are willing to lose. They are a supply and demand investment. They are not backed by anything of value. Bitcoin was selling at $59,000 per coin just a short time ago and is now at $33,000. Those that got in just a few months ago have lost a lot of money. I would not build a retirement portfolio around crypto currencies as the core investment. They are too volatile. Wait until the regulators put their stamp on them. Who knows what impact that will have?
The Fed continues to be very accommodative with interest rates. This is why the housing market is going through the roof. This will not last forever. The average 30-year mortgage interest rate over the last 30 years has been 7.5%. If you have not refinanced, now is the time to take advantage of these great rates. Get all the cheap money you can while it lasts. In my opinion, active money management is the only way to navigate the challenging times we live in. I personally do not keep my own money in a bank. It has no chance to keep pace with inflation.