Inflation: Transitory or Here to Stay?

The economic recovery continues to forge ahead on a path similar to what we described in our annual Outlook late last year. Fueled by government stimulus and low interest rates, the recovery is gaining steam with many local economies fully opening as a result of vaccine distribution efforts. This past quarter may mark the peak in the rate of economic growth for this expansion, apart from the extraordinary bounce-back in the third quarter of last year.

Overall, 2021 is progressing as many expected. We won’t know if inflation will be temporary or longer-term until after the fact, but we will be watching it closely, especially wage inflation, which has started to pick up. We think there will be more volatility in both equity and bond markets in the second half of this year as market participants weigh inflation risks, high equity valuations, and low bond yields.

At-a-Glance

• Developed economies continue to ride stimulus tailwinds as vaccine distribution peaks.
• Inflationary pressures are building, but central banks are largely dismissing above-trend inflation as temporary.
• Stock and bond investors seem to agree with central banks and see temporary inflation as a possible benefit for companies to raise profit margins and reduce debt on an inflation-adjusted basis.
• Stocks and bonds both seem relatively expensive, but possibly justified by the good economic backdrop.
• Volatility could pick up in the second half of the year as investors continue to assess risks, mainly rising inflation.
• We continue to recommend diversifying across and within asset classes, along with a focus on long-term objectives and not getting caught up in day-to-day fluctuations and noise.

The Market Outlook is published by Cetera Investment Management LLC, an SEC registered adviser owned by Cetera Financial Group. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.