Investors and Advisors Are Compelled to Consider the Hard Economic Realities Facing the Financial Markets

As investors and financial advisors approach the end of 2021 and consider their annual recalibration of portfolio mix for the coming year, they would be prudent to factor in some difficult economic realities that can no longer be ignored–that will alter stock and bond performance into and well past 2022.

And those hard realities urgently argue for a different approach for attaining attractive returns while effectively managing the ever-present, but growing, risks in the financial markets.

Multiple data points show a current U.S. economy as fragile as the coming snowflakes. To name a few:

  • The U.S. economy is struggling. It grew at a 2 percent annualized pace in the third quarter, its slowest increase since the end of the 2020 recession. This follows a 6.5 percent rise in the second quarter, which was well below expectations.
  • Inflation is getting worse. Inflation is at a 30-year high, growing to a 4.4 percent annual rate in September, while personal income declined at a faster pace than expected. All while Congress and the administration has and adamantly continues to push to inject more money into the economy through its varied and multiple stimulus programs. So far this fiscal year, the federal government has run a cumulative deficit of $2.7 trillion, which is 150 percent larger than the fiscal year 2019 deficit ($1.6 trillion greater) at this point in the year.
  • Bond yields are bottom of the barrel and are eroded by inflation. Current 10-year Treasury Bonds are yielding roughly 1.5 percent. (Let me do the math for you: 4.4 inflation minus 1.5 yield equals down 2.9 percent).
  • The Federal Reserve is out of bullets. Rates are already near zero and can only go up (thus adding to inflationary pressures).
  • The labor shortage is becoming a fixture of the U.S. economy. The country is missing more than four million workers compared to the start of the COVID-19 pandemic. Employers are struggling to fill 10 million job openings.
  • The nation’s supply chain is in chaos and according to Moody’s Analytics, supply chain bottlenecks are disrupting the global economic recovery and are “getting worse.”
  • Consumer demand and spending is strong (Econ 101: high demand plus product shortage equals rising prices).