Inflation Nation: What’s Behind the Current Inflation?

Inflation Nation: What’s Behind the Current Inflation?

If we think back to the outset of 2021 – which feels more like 10 years ago than a year and a half – it was easy to overlook inflation, while we focused on rolling out COVID-19 vaccines and the start of a new presidency. But the problems we’re currently facing with the rise in inflation were percolating under the surface. 

Back in Dec. 2020, the Federal Reserve estimated that the Personal Consumption Expenditure Price Index (PCE), which excludes food and energy prices, would rise by 1.8%. By the time June 2021 rolled around, that was up to 3%. And by the end of 2021, it was at 4.1%. With all of the issues that our economy faced as we clawed back from the COVID-induced market downturn, the Fed was hesitant to raise rates too quickly, as it tried to navigate more pressing economic matters. 

The Consumer Price Index (CPI) provides further evidence of inflation. The most recent figures at the end of June showed CPI had increased to 9.1%, the highest 12-month increase in 40 years. 

So, how have we gotten to this point with inflation? The Fed continued to keep interest rates low as they injected the economy with new money in the early stages of COVID-19. There are several reasons that we are dealing with record inflation, but this factor should not be overlooked. 

Another phrase bandied about over the last year-plus is ‘supply chain issues.’ Any time there is a high demand for goods and services, but there is a low supply, you will see prices rise. Now past the halfway point of 2022, we are seeing how this has played out. Though gas prices have begun to dip back below $4 a gallon in many states, they are still close to $4.50 per gallon nationally as of Aug. 5. This is having a drastic impact on the companies that rely on fuel to get their products through the supply chain. It is also impacting consumers as they are spending far more on filling up their tanks than before, which in turn leads to less saving and less spending on items that are non-essential. When you couple that with the Federal Reserve raising interest rates to 2.50%, there is uncertainty about our economy. 

The crisis in Ukraine has also played a key factor in these rising energy costs, particularly in fuel, an impact that can be seen in the CPI number. Russia invaded Ukraine on Feb. 24, and the price in gasoline in the U.S. began its rapid ascent shortly thereafter, with its steepest climb in the first half of March.

Lastly, COVID-19 created many fissures in our economy. Employees have had increased leverage to leave their current jobs, while employers have struggled to find enough employees, including a restaurant in Texas that asked for volunteers to make sandwiches in return for one free sandwich. 

It would’ve been hard to anticipate at the start of 2021 that all of these factors would have coalesced to bring us to our current situation. But regardless of how we got here, we’re still in the thick of this inflationary environment. We’ll receive July’s inflation numbers on Aug. 10, which may give a better picture of the impact of the Fed’s decision to increase interest rates. 

And there is a chance that we could go into a recession, which could be painful in the short-term. But if history is any lesson, we will emerge from the current downward trend. And especially during times like this, it’s important to have a plan and stick to it through diversification and owning quality assets and asset-classes. 


Jonathon Jordan, CFP®, CEPA

Jonathon Jordan, CFP®, CEPA

Financial Advisor, PARTNER

Jonathon Jordan is a Certified Financial Planner ™ and Certified Exit Planning Advisor at Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

Webinar: State of the Market Halfway Through 2022

Webinar: State of the Market Halfway Through 2022

When it comes to finances and investing, 2022 has started in a rocky fashion. The lasting impacts of COVID-19 – including its continued effect on supply chain snags – and Russia’s invasion of Ukraine have had a hand in the increasing impact of inflation, as well as the rollercoaster ride of the stock markets. And regardless of whether you have an advisor or you manage your own investments, you’d be lucky to be down only a few percent year-to-date.

With an underwhelming last six months in the books, we felt it was an important time to have a transparent conversation about the state of the market. And while this is geared toward our clients, we cover lots of ground that every investor should know right now from stock performance year-to-date to treasuries and mortgages to the inverted yield curve.

Questions or Comments?

If you have any questions or would like to discuss anything from the State of the Market webinar more in-depth, please feel free to reach out to our team by tapping the button below. You can also schedule an appointment by clicking here.

What is a Recession and Why a Recession Matters

What is a Recession and Why a Recession Matters

We have experienced quite a start to the year. The equity markets have had a difficult start to 2022, with the S&P 500, the Dow Jones Industrial, and NASDAQ all seeing double-digit losses. Many of the bond indexes have seen historically bad beginnings to the year as well. The year-to-date losses in the equity and bond markets, coupled with rising inflation rates and a persistent war in Ukraine, have greatly increased the likelihood of a recession. As a result, we have seen the term recession take center stage in many new headlines and broadcasts. Let’s take a closer look at recessions and how one may impact the economy and markets for the remainder of 2022. 

Defining a Recession

The most widely accepted definition of a recession is two consecutive quarters of negative economic growth, as measured by GDP. However, more recently, the description has expanded to include other economic criteria, including depth, diffusion, and duration. The National Bureau of Economic Research has a definition that is more flexible because no two recessions are the same, therefore, a broader interpretation makes sense. One recession may be caused by a shake-up in the labor markets while another may be due to an unexpected shift in the economy such as the housing market crash in 2008-2009 or a non-economic factor such as a pandemic. Hallmarks of a recession typically include companies missing on earnings projections and negatively adjusting future forecasts, consumers curtailing discretionary spending, and a feeling of overall uncertainty that can become palpable. 


Why Does It Matter So Much?

The reason why recessions matter so much to economists is that they indicate the slowing of an economy and can lead to many negative consequences such as job losses, companies going out of business, and prolonged stock market volatility. Recessions create an unpredictable economic environment. Once a recession has started, it is very difficult to determine how long it will last or how much damage it will do. We typically see the adverse effects of a recession before economists are able to officially say we are in a recession. We may very well be experiencing some effects in our current economic situation. The economy did contract in the first quarter of 2022, with a GDP drop of 1.6% annualized. We likely won’t know the final GDP growth or contraction rate in the 2nd quarter until late September; however, many of the domestic and international stock indexes are already reacting as though we are in an economic slowdown. One thing is becoming abundantly clear – the driving force behind the current economic slowdown is the return of inflation. We haven’t seen inflation levels this high since the early 1980s. If inflation persists into 2023, it will likely have a negative effect on consumer spending as well as overall consumer sentiment.    

What To Do As An Investor?

The pressing question for investors navigating through a recession is how to protect their investment portfolio. The most prudent answer to the question is diversification and patience. Since WWII, the average recession lasted roughly 11 months. Conversely, the average bull market lasts roughly 2.7 years. A well-diversified portfolio that matches the investor’s risk profile will give the best chance for long-term gains, even taking the losses of a down market into consideration. Assuming a well-diversified portfolio is in place, the most critical variable is the behavior of the investor. This is because staying invested through down markets takes resolve and fortitude, it is not for the faint of heart. Seeing monthly statement after monthly statement filled with negative numbers can cause even experienced investors to make questionable decisions. Remember, recessions are part of an economy’s natural cycle, not a deviation from it.    


Nate Condon

Nate Condon

Financial Advisor

Nate Condon is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

The 2022 Sell-Off: Making Sense of the Markets

The 2022 Sell-Off: Making Sense of the Markets

The market weakness in 2022 has continued to accelerate, driving equity prices lower. While it may feel like a pretty extreme selloff, the S&P 500 selling off 15% is fairly normal, occurring every 2.5 years. Even if we reach a “bear market”, defined as a 20% or more decline, this will occur on average every 4 years, so we are experiencing a phenomenon that is relatively frequent.

This, of course, doesn’t make anyone feel particularly better. As our revenue is tied to our clients’ assets under management and every advisor in our firm invests in the stock market in some form, we all feel the pain. There are many reasons for this. Inflation has run significantly above target levels. The Fed is moving away from ultra-low interest rate policies. And the war in Ukraine continues. These have all contributed to the uncertainty surrounding companies and their future outlook.

We have continued to watch earnings as they have been reported. Presently, they still are strong but earnings surprises have trended lower and future earnings are looking a bit more tenuous pending all the above uncertainty. This is not to say that we haven’t already hit the bottom of this pullback, nor is it saying that things can’t get worse. It is worth mentioning that today’s stock prices reflect the expectations of future earnings by companies. It is predictive in nature, and that’s why we have seen the results in 2022 when we look in a rearview mirror. An end to the Ukraine war, easing of inflation numbers, reduced COVID cases & lockdowns, and better news on supply chains could all be factors that will likely drive equity markets higher. A dive into a bear market could be caused by a worsening of any of the above as well, and that is precisely why we tend to advise caution in making any short-term decisions that can have long-term impacts.

Did you also know that the bond market is having its worst year since 1842(!!!)? Normally we see an inverse relationship between stocks and bonds, with bonds increasing in value while we see a negative stock market.

So, What to Do?

Assessing timeframes is obviously extremely important. Keep in mind that despite the pretty awful market we’ve seen so far this year, the longer-term returns look strong. Here’s a chart of the S&P 500 over the last five years:

Just from eyeballing the chart, you can also see that we’ve had some pretty feracious pullbacks before we hit higher highs. The difference between now and then? Inflation is running hot, and recent reports are showing that it is not coming down quickly.

What Can We Expect in the Future?

According to research by First Trust, out of the last 185 quarters, only 16 had stocks and bonds falling together. When we look back at historical data, returns tend to be positive in the stock and bond markets, especially in the 1- and 3-year periods. See this chart that lays out prior stock and bond market returns. While we know that the future is uncertain, we also know that it’s almost never about timing the market, it’s about time in the market.

Clint Walkner

Market Correction: What It Is and Why Market Corrections Matter

Market Correction: What It Is and Why Market Corrections Matter

The domestic and international stock markets have started 2022 with a level of volatility unseen for the past few years. The rather benign market conditions, over the last 10 years, have lulled investors into a false sense of security and normalcy that is anything but normal. 

This is completely understandable when we look at the recent history of the S&P 500, a benchmark for US stocks. The S&P 500 has only posted one year of negative returns greater than 1% since 2009. The index’s loss of 6.24% in 2018 was paltry compared to its 38% loss in 2008 and three consecutive double-digit down years of 2000-2002. This is all to say that the beginning of 2022 is a reminder that volatility and market corrections are part of the normal market cycle, not a deviation from it. 

What is a Market Correction?

The term “market correction” is generally defined as a drop in a given market index of at least 10%, but not more than 20%. A drop of more than 20% is referred to as a bear market.

To give some perspective on the recent history of market corrections, the S&P 500 experienced a market correction in 11 of the past 20 years. Further, the S&P has experienced a correction, on average, every 19 months since 1928. This helps to illustrate the fact that market corrections are common over most periods of time and should be viewed as the market resetting stock valuations back to a more fundamental level.

Most economists believe that periodic corrections are healthy for investment markets, particularly stock markets, as equities tend to have large price swings. As stock prices appreciate over periods of time, there can start to become a disconnect between the valuation for a company and the price of its common stock. While the relationship of company valuations and respective stock prices can be a moving target, market corrections help to bring this relationship back in line, and, in some cases, corrections can provide a buying opportunity as the stock price may fall too far relative to the valuation. The circumstances and variables that cause the to market slide are different each time, which makes predicting when a correction will happen and for how long nearly impossible. Furthermore, many corrections have been caused by non-financial related events such as geopolitical issues or military skirmishes.

Investing During a Market Correction

Now that we have a better understanding of corrections and their history, we need to turn our attention to how we should react during a correction. Corrections can be a scary, unnerving period of time in a market cycle, however, history shows us that corrections last, on average, four months before the market makes up the loss. This is the reason why most economists recommend riding out market downturns. Often people ask the question, “why not just sell stock positions when the market begins to fall and buy back in when the market bottoms”. This is almost always a recipe for disaster as it requires correct market timing, not one, but two major moves in a portfolio. It also requires that we are actually at the start of a correction. We know that we are in a correction once the market has already fallen 10% and, by that point, it is too late to avoid the loss by selling shares. The best advice for weathering volatility in the markets is to fully understand your personal risk tolerance and accurately match your investment allocation to that risk profile. This way, we can have confidence that our portfolio is built to withstand the appropriate amount of market loss for your specific situation.

Nate Condon

It Only Gets Harder from Here: Valuations, Bond Environment and Wage Growth

It Only Gets Harder from Here: Valuations, Bond Environment and Wage Growth

If we look back at the stock and bond markets with a Monday Morning quarterback lens post-2008 financial crisis, one has to consider if the “easy money” has already been made. It’s almost hard to believe that the historically good run in equity markets has also been coupled with a favorable bond environment as well, with returns looking very solid net of inflation through many portfolios. The simplicity of this gain also bears noting  – if you simply bought the S&P 500 and coupled it with an aggregate bond strategy solely based in the United States, you did very well for yourself.

Note: SPY used for S&P 500 index proxy, AGG for aggregate bonds, DBC for commodities, EFA for international developed companies, and VWO for emerging markets. 

Naturally, we can ascertain from this chart that it hasn’t been a totally smooth ride from the equities perspective, but it is also safe to say that stocks have pretty much acted as stocks should. It also should be noted that a globally diversified portfolio detracted from your gains over this period compared to a solely U.S.-focused one. 

Looking forward, as we digest both the longer-term past as well as the last 12 months, some headwinds are developing that may affect the future of our portfolio management. Some of these will be more fleshed out in the remainder of our commentary, as they bear a deeper dive. 

Here are three of the main challenges we see as we go forward.

Stretched Valuations, Particularly in U.S. Equities?

Generally, the thoughts we get from many of our clients is that the U.S. stock market is overvalued. Over the last year, however, many may not realize that the “overvaluation” of the market 12 months ago was even more pronounced than it is today. See this price to earnings ratios (P/E) chart since 2017:

Note: This is the S&P 500 index price to earnings (P/E) ratio.

Why did this occur? Simply speaking, the earnings of companies ended up catching up while revenues remained strong due to waning COVID lockdown measures coupled with unprecedented government stimulus. Treating 2020 as somewhat of an outlier due to COVID factors, today’s P/E ratio remains elevated relative to the last 10 years. 

The question remains whether this elevated P/E ratio actually signals that the U.S. market is overvalued. There are several factors that come into play – low interest rates with expected interest rate increases, pension and institutional wealth funds trying to hit rate of return targets, inflation expectations, and many others. These factors when coupled together paint a much more complex picture of the “why” concerning elevated P/E. But in the end, we will continue to need strong earnings to support higher prices. In 2022, we see more headwinds due to an anticipation of higher rates, potentially pouring some cold water on the inflation heat and possibly slowing growth as a result. We also believe that there should be tailwinds – at some point, we will emerge from COVID, leisure activities and travel will increase significantly, and taxation on businesses and individuals will likely remain low until at least 2025 absent any unexpected legislation. 

Low-Interest Rate Environment Matched with Expected Low Returns in Bonds

The Fed has been quite transparent about its plans to raise interest rates throughout 2022 in a response to inflationary pressures and potential overheating of the U.S. economy. While we have been through a long-term decline in interest rates over the last thirty years, there have been periods of time where interest rates have been on an upward trajectory, albeit relatively short ones. One more recent period of time where this occurred was in 2018 when the 10-year treasury rate increased over 12%. In looking at how this increase in rates affects bond prices and yields, we can reference the following chart:

Note: BND used to represent the total bond market, BSV used to represent short-term bonds.

Some takeaways from this:

    • The 10-year treasury did not move in a straight line during the year. Despite this, dividend yields from the two ETFs (used as examples), steadily climbed throughout much of the year.
    • As yields climbed, prices fell, which is the conventional wisdom we learn in economic textbooks. Keep in mind that the 10-year treasury started in the 2.5% range in 2018 and crested over 3%. We ended 2021 with a rate of around 1.5%. Here is a data source for treasury rates.
    • Short-term bonds weathered the higher interest rates better than longer-term bonds, which again would fit conventional wisdom. Additionally, shorter-term bonds were less volatile than longer ones during this period.

As we look at 2022 and beyond, we expect interest rates to keep climbing throughout the year, though it is unlikely the climb will be in a straight line. One strategy to employ for the year would be to keep the duration of your bonds short if interest rates do indeed rise, and perhaps consider using some inflation-protected bonds if you expect inflation to continue to remain high. The issue with that is we are starting from a very low-interest rate – the 10-year treasury (which would be considered intermediate bond duration) is still well below 2% at the time of this writing in early January. As rates rise, bond prices will fall, so it is highly unlikely we will see much in the way of gains.

Another strategy is to move into higher-yielding bonds – perhaps considering lower credit quality or floating rate bonds to juice up yields. The issue with going too far down that path is simply that a decrease in credit quality will lead to taking higher risk in your overall portfolio, and aren’t bonds supposed to be your hedge against falling stock prices and your way to diversify? 

If you are gathering from the above comments that this is a tough environment for bond investors, you would be correct. Starting from such low yields, historically speaking, with the prospects of increases in interest rates, would portend a less than rosy outlook for bonds in the near future.

Uncertainty of Wage Growth

Nearly 70% of our GDP measurement ends up coming from consumer spending. When we emerged from the depths of the pandemic, as states started to reopen, there was a significant shortage of workers to fill job openings. Resultantly, we saw a significant increase in wages that persists today (and at the bottom of the wage ranges, this started before COVID). This is the good news. 

The bad news is this is only one side of the equation, as we care more about “real” wage growth, defined as wage growth minus inflation. Unfortunately, we have seen inflation quickly overwhelm wage gains. As we all have felt the higher prices at the pump and in our grocery stores, we all hope these will be temporary

If Americans are feeling the effects of inflation, several things could happen:

    • Purchases could be delayed or canceled due to the increased costs of items.
    • Substitutions could be made to minimize the impact of price increases, for example, instead of buying the organic strawberries you choose to buy non-organic or you substitute pork for beef.
    • Purchases are accelerated with the thought that prices will be higher in the future. For example, ordering countertops from Home Depot now instead of waiting a few years.

Aside from the accelerated purchases, cancellations or substitutions will be negative for GDP growth. Additionally, the greater wage uncertainty one has, the less “risk” they are willing to take when making purchases. If “real” wage growth isn’t so real, despite the likely outcome of prices being higher a few years from now, a family may not choose to buy a home, automobile, or other higher-priced items just based on the perception that they won’t be able to maintain their purchasing power. 

So What Does This Mean for 2022?

We don’t believe in producing a market forecast, as it is a fool’s errand. What we will posit is that we expect greater volatility, as the first few days of 2022 would indicate, while returns may come a bit harder than 2021. As it stands, to score runs right now we may have to settle for some small ball and lots of singles – for those baseball fans out there. For advisors, it means that we have to remain open to considering investments beyond the S&P 500, as we always have. In any market, there will always be opportunities. Perhaps this can be found in considering a rotation towards value-oriented U.S. stocks, a more substantive allocation to non-U.S. stocks, or potentially, more tangible assets such as commodities or real estate. In the end, we all must remember that time frame and time in the market are inherently crucial to long-term success, so review these items with your advisor in your strategy meetings to see how it applies to you specifically.

Clint Walkner

2022 Investment & Market Outlook Guide

Clint Walkner’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.