You have to go back 50 years to the 1970s to see inflation raging like it is today. Back then we were suffering from an oil embargo, the implementation of LBJ’s domestic spending program called “The Great Society,” funding the Viet Nam War and the Impeachment of Richard Nixon. The inflation saga of the 1970s and 80s ended when Fed Chairman Paul Volker raised interest rates so high that it caused a profoundly serious recession under one term President Jimmy Carter and during the first term of Ronald Reagan.
As we look to 2022, there are negative and positive issues we need to address. Here are the negatives:
Today we are facing inflation rates that many thought we would never see again in our lifetime. How high will it go and how long will it last? Again, government spending and White House and Congressional policy decisions (like stopping oil and gas exploration on federal lands and the elimination of the XL pipeline) are partially to blame. We were an oil exporting nation just twelve short months ago and now we are once again dependent on OPEC for our energy. Also, there is a shortage of truck drivers which has led to supply chain issues. We are dependent on foreign suppliers and manufacturers for most of our products. Inflation is caused by too much money chasing too few goods. Government spending which started in earnest at the start of the Covid pandemic is really getting out of control with the recent passage of the infrastructure bill. The Build Back Better Bill is currently at $2.3 trillion. A large part of this is offset by tax increases. If all the benefits are made permanent without a tax increase, then the total could be $5 trillion minus current tax increases. Whether this passes in the next couple of weeks appears to be dependent on two Democrat Senators.
So far, The Federal Reserve has been extremely accommodative with very relaxed monetary policy of low interest rates and money supply. However, starting last month, the Fed began tapering the purchase of mortgage backed and treasury bonds which has pumped money into our economy since the 2007-08 great recession. All it will take for the economy to really take a nosedive in 2022 is for interest rates to start to rise to tackle the inflation. Fed officials have maintained that high inflation levels in the U.S. are transitory, and prices should retreat once the distortion of stimulus-induced demand met with COVID restricted supply. Usually when the Fed raises interest rates three times there is an economic slowdown of some magnitude, and we are watching what the Fed does very closely.
Finally, there is a fear that taxes will be increased to pay for all of this government spending.
It is said that the stock market climbs a wall of worry and while there is much to concern us, in 2022 there are many things which are positive.
In conclusion, the economy is far from perfect, but demand is strong, the jobs market is wide open, and corporations are posting record profits. Yet few people are happy. Instead, widespread concern and worry over inflation, supply chains, labor shortages, COVID variants are prevailing. That makes us even more bullish. When everyone is fixated on an issue and it becomes widely discussed, its pricing power concurrently falls. This is how “walls of worry” get built, and stocks love to climb them.
This article represents the opinion of John R. Stewart as of June 15, 2022. John R. Stewart is an investment advisor representative with Physicians Wealth Solutions, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risks and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discusses herein.