“Have you heard about this Covid thing?”
As we ring in the New Year, we find ourselves still in the midst of the Covid-19 pandemic. In the end, Covid-19 will become an endemic disease, like the flu, but it will take time. For now, we need to continue to be watchful and manage for the looming macroeconomic risks:
- The pandemic pushed a lot of baby boomers into early retirement causing a large “brain (and people) drain” for companies across the board.
- The continued trend to push all students to college, combined with a lack of trade school funding, has created a nation-wide job/skills mismatch.
- Since 2007, the U.S. birth rate has consistently been below the replacement rate of 2,100 births per 1,000 women. In 2020, the total fertility rate fell 4% to a record low of 1,637 births per 1,000 women.
- For more than the past decade, a lack of consistent immigration policy has made it difficult for employers to bring qualified workers to the U.S. while also keeping hundreds of thousands of immigrants in legal limbo.
These issues (and others) have kept the labor force participation rate from getting back to pre-pandemic levels. There are 3 million less people in the labor force today than in February 2020. This is causing a lot of ripple effects and drag throughout the economy. The rapid price increases due to supply chain disruptions are now being aggravated by businesses’ need to raise worker compensation to attract job applicants.
Facing these facts, the Federal Reserve has finally come clean and admitted that the rise in inflation is not transitory. They are reducing their economic support and we expect that they will be raising interest rates to try to bring the 6.8% year over year inflation under control. This could cause a lot of consternation for the markets. Growth stocks are a large percentage of the S&P 500’s valuation. Growth stocks do not fare well in an inflationary environment. We have been (and will continue) to take action to hedge your portfolios against the expected volatility.
Dealing with these unusual demographic, political and inflationary shifts will require us to refocus our investments to continue to keep your assets secure while earning a fair rate of return. We thank you for continuing to place your trust in us.
Very truly yours,
Michael Cantlon
Thomas Guyett
Robert Gephart