In addition to being a Hallowe’en grinch, I dislike turkey. I love almost everything else in a standard Thanksgiving meal, but this particular poultry just has an unpleasant flavor to me. For years I kept this to myself, ashamed of my fowl secret (tee hee). Finally, a few years ago, I confessed, telling my kids that I would cook any other bird we could buy. They both piped up with “goose stuffed with apples, prunes, and pine nuts.” I think they had just watched A Christmas Carol at their dad’s house. Anyway, it was delicious. It requires more attention than a turkey but cooks faster and tastes like ham. The whole family was happy because I took a risk. And guess what? Almost everyone else I’ve told dislikes turkey, too. Maybe next year I can try a duck.
Risk looks different in securities markets and economic growth, but it is still necessary for gain. Very little can be accomplished by hiding from the possibility of loss, in cash or outdated but familiar industry practices. There are lots of ways to measure risk in securities markets, but the most commonly used one is volatility: how much are returns varying from period to period? Mathematically very appealing, but it doesn’t tell the complete story. For example, here are two different possible stock return patterns:
The one on the left has volatile but rising returns. The one on the right has very low volatility – it just keeps losing about the same amount, day after day. In this case, accepting more volatility is clearly beneficial, even though it might be uncomfortable at times.
Employers competed for 0.7 available workers per job in September, according to the Bureau of Labor Statistics. Even if there were no skills mismatches, there simply aren’t enough interested people to fill all the open positions. Some industries can adapt to use a higher capital-to-worker ratio to keep up with demand for their products, but this is difficult in, say, a bar. Robots serving drinks might be an interesting solution, but it would lack a certain ambiance, not to mention we’re still suffering from a microchip shortage as well. Also, it’s not something we can switch to in a few days.
While gasoline and fuel oil are to blame for much of October’s change in prices, even “core” inflation rose more than four percent over the past twelve months. We’re still seeing the effect of vehicle price rises in that number, but the relevant categories (new vehicles and used vehicles) have both calmed down quite a bit in recent months. Even at a combined weight of just over 7%, a close look at the leap last year explains the dramatic effect. Since the most commonly reported measure of inflation is “change over the past twelve months,” these brief spikes will continue to make “headline inflation” look high for most of another year, at least. We may also see a similar effect as housing costs ripple through the CPI, so stay tuned. All that said, a brief period of higher inflation is usually not a disaster, for the country broadly or the average household.
I continue to believe that our economy, both the people and the products, are in transition at present. From working from home to starting one’s own business to not working at all, the labor force is shifting, in response both to opportunities and constraints, from social distancing to the need for childcare. The products and services are changing along with it – consider business attire or travel packages. Any parent with a ‘tween can tell you transitions are hard. They can be awkward, even painful. But they are temporary, thank goodness, and much like the capable, confident young adults we all hope to meet at the other end, our world may well be the better for it.
Stocks turned downward towards the end of November, ending the month below October levels both in the US and other developed markets. U.S. equities are still up significantly year-to-date, but of course we have one month left to see what 2021’s totals will be. As is often the case, the Barclay’s Aggregate Bond Index rose as equities fell. Shorter-term Treasury interest rates are little changed year-to-date, but the middle of the curve – 3, 5, and 7 year notes – have risen more noticeably. This is broadly interpreted to mean that bond investors expect short-term rates to increase over the next few years. Interest rates are often not terribly interesting (sorry) to broad audiences beyond what financing we can get on our houses, but they do contain information about how market participants are interpreting both economic data and government policy.
Hopefully our comments will help readers ride the volatility waves with greater ease, but if there is anything else we can do, let us know. We are here to help!