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Quarterly Letter - July 2021

by Peter J. Connors, CFA, on July 01, 2021

We hope you are enjoying summer and rediscovering some of life’s missing pleasures as we all try to emerge from the very difficult pandemic.

Market performance has been robust during the first half of 2021, with the S&P 500® delivering 15.2% and the Russell 2000®, 17.5%.   The market is clearly anticipating a stabilizing and strengthening economy, with some in the most optimistic camp suggesting a post-WWII-like environment.   However, key obstacles remain: labor participation rates (particularly in the retail, restaurant, and manufacturing sectors – “Help Wanted” signs abound!), inventory imbalances and demand shifts stemming from the economic shutdown, unprecedented stay-at-home policies and government intervention.

These effects are creating inflationary impacts in most areas of the economy. Whether inflationary effects are temporary or longer-lasting seems to be up for debate, not unexpectedly. The Federal Reserve has forecasted a spike in prices as the U.S. economy reopens, and even legendary investor Warren Buffet said during Berkshire Hathaway’s annual meeting in May that he is seeing “very substantial inflation” and his companies are raising prices.

Federal Reserve Chairman Jerome Powell and other officials contend that the recent spike reflects the effects of demand/supply imbalances resulting from the pandemic. The Fed has made clear it doesn’t expect inflation to prove stubborn and is willing to tolerate an economy that runs hot and pushes inflation above its usual target of 2% for an unspecified period before pulling back on its extraordinary monetary stimulus efforts.

Is inflation good for stocks?

The answer may depend on whom you ask and what historical data you think is germane. Inflation is not all bad. Some inflation can be beneficial. For example, under some circumstances modest inflation could stimulate job growth. Mild inflation is generally good because it is a sign the economy is growing and businesses can typically raise prices. There may even be a sweet spot for inflation. Stocks may provide some protection as a hedge against inflation as a company’s revenues and profits should grow at the same rate as inflation, after a period of adjustment.

As economists grapple with whether the U.S. is in store for a prolonged bout of inflation or a mere blip on the chart, equity analysts have turned their attention to exploring just what it would mean for the stock market if inflation were to take hold.

What does history show?

When inflation appears imminent, investor instincts are to overweight cash and bonds and shy away from higher risk/reward instruments such as stocks. What does history tell us about investing during higher than normal periods of inflation?

We analyzed the highest inflation years since World War II using raw stock, bond, Treasury bill and inflation data provided by Ibbotson Associates. Focusing on the 20 highest years of inflation in this 74-year period, eight were the highly inflationary and difficult market performance years of the 1970s. Inflation rates within the 20 years were lowest in 1987, at 4.4%, and highest in 1946, at 18.2%, immediately following WWII.

20 Highest inflation years (1946,’47,’50,’51,’68,’69,’70,’73,’74,’75,’76,’77,’78,’79,’80,’81,’87,’88,’89,’90)

                Asset class                        Avg. annual return           Return rate adjusted for inflation

                Large company stocks                  8.8 %                                   0.9 %

                Small company stocks                  11.8 %                                   3.9 %

                Long-term govt. bonds                  2.8 %                                   -5.1 %

                T-bills (cash equivalent)               6.2 %                                   -1.7 %

                Mattress                                               0.0 %                                   -7.9 %


All years (1946-2020)

                Asset class                              Avg. annual return           Return rate adjusted for inflation

                Large company stocks                  11.3 %                                   7.6 %

                Small company stocks                   12.7 %                                   9.0 %

                Long-term govt. bonds                  6.0 %                                   2.3 %

                T-bills (cash equivalent)                3.9 %                                   0.2 %

                Mattress                                                0.0 %                                   -3.7 %


During the 20 highest inflation years, positive investment results were achieved across all investment asset classes. Modest but positive inflation-adjusted gains were made by both small and large company stock holdings. Classically viewed “safe haven” instruments, such as long-term government bonds or cash, actually saw modest declines in spending power and reduced wealth. Doing nothing but holding non-interest-bearing cash, and fighting the average annual headwind of 7.9% inflation, showed the worst outcome – leaving the non-investor, on average, with $921 of spending power vs. his $1,000, in a typical year.  

A time traveler from 1946, arriving today and accustomed to stashing his cash under the mattress, would find the hard-earned money in his pocket would buy him less than 1/16 of what it could in 1946. If invested before his journey in large company stocks, for example, and avoiding emotional responses to the world’s good and bad news of the last 74 years, but still achieving their returns, he would likely be very surprised to find his $1,000 investment valued at over $2.7 million, or at 225 times his spending power, even after accounting for the effects of inflation!

As always, and with cautious optimism, we continue to carefully monitor market conditions as we manage your portfolio to meet your objectives.



Peter J. Connors, CFA



Important Disclosures

This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Opinions are subject to change without notice.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. [“Connors]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and, (3) a description of each comparative benchmark/index is available upon request.                                

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