By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
Welcome,
Back in 1972, McDonald’s introduced its Quarter Pounder hamburger with great success. Years later, in 1980, A&W thought they would play off the success of the Quarter Pounder and introduced their “Third-Pound burger.”
In blind tastings, consumers preferred the third-pound burger. Plus, it was more meat at the same price of the Quarter Pounder.
Nevertheless, the third-pound burger was a disaster; a complete failure.
What happened?
Consumers failed elementary math; believing 1/4 was larger than 1/3. In fact, consumers questioned why they would pay the same for a 1/3 pound burger when it was smaller than 1/4. They thought they were being overcharged. After all, three is less than four.
Fast-forward to today; not wanting to make another marketing failure, A&W introduced the 3/9 burger. Hoping the bigger numbers lead to bigger sales.
Let’s look at the numbers since the weak month of September. October set the stage for a nice reversal in September’s numbers. To be clear, many issues remain.
Supply chain bottle necks have not been resolved, as labor and materials remain scarce.
We still have more job openings than workers looking to fill the positions. All of these are putting pressure on costs.
This leads to questions on inflation. Prices have moved up, but some areas are transitory. Lumber is back down, while oil has remained high. But this does not seem to be like the inflation of the 70’s.
Wages will stay high, the supply chain will clear, and workers need to get to work.
Should work force participation remain low, we could see lower inflation numbers if there is a corresponding reduction in demand.
The S&P finished up almost 7%, while technology pushed higher as we saw the Nasdaq push up over 7%. Small companies moved forward over 4% and even international markets logged roughly 2% gains.
Will this continue? Possibly. The opening trade seems to be finally playing out, as Covid numbers remain low.
The consumer has not slowed buying, even as prices have increased.
Companies have reported mixed results as the supply chain has been mentioned as one of the main culprits of weaker earnings. Analysts have lowered earnings expectations going forward.
The Fed will be meeting shortly and the “tapering” of bond purchases appears to be baked into current returns. The Fed should remain highly accommodative as they have moved away from worrying about inflation and are hyper-focused on employment.
Conclusion
Wall Street knows that most investors may fail elementary math, so they (along with the media) push fear. Inflation is the currency that is trading hands today. Fear sells, but who is selling and why? Transactions drive the street, the more you sell the more they make (elementary, my dear Watson). Sell this, buy that.
Currently the consensus is that inflation is coming in hot. However, historically, the more Wall Street agrees their forecast are inevitable, the more likely the outcome will be rejected.
We build well-diversified portfolios that should be able to keep pace with future inflation. Stocks have historically done well in the face of inflation; they have also done well without inflation. One-fourth may be less than one-third, as fear should be less than happiness.
Should you have any questions, please don’t hesitate to reach out. We are here for you and look forward to speaking with you.
Disclosure
The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
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