An insurrection led by our sitting president, a cryptocurrency boom, and the crippling covid-19 have already made 2021 an interesting year. As we learned in 2020, the stock market can power up even when the world is in disarray.

Here are 3 variables that are top of mind on our radar that may impact your investments this year.

/ Inflation

This is an important macroeconomic factor to monitor as it represents rises in price across different markets. Inflation has remained low, despite massive efforts to stimulate the economy and raise prices by monetary and fiscal authorities around the globe. Prices in the United States have risen only 1.16% year over year, according to the most recent data from the US Federal Reserve. Previously, the Fed wanted inflation to run around 2% year over year, but after years of muted inflation they have walked away from their prior guidance, suggesting they will let inflation “run hot”, or well over 2%.

Actual inflation versus expected inflation will play a big role in investor behavior, as well. Once investors begin to expect higher prices, higher prices will materialize, in our view. Take a look at inflation expectations since Q1 2020 in the chart below. Will they keep climbing?

Inflation can affect nearly every asset class. If inflation rises, real assets like real estate, gold, or silver could rise alongside. Further, rising inflation may hurt consumer spending, as goods and services become more expensive for consumers. There are a number of other potential outcomes that I encourage you to contemplate or share.

/ Interest rates

Interest rates are the major determinant of the flow of credit in our economy. Changes in rates have a material impact on borrowing costs for many things affecting real estate mortgages, company operations, and student loans. Monetary policy from the US Federal Reserve has kept interest rates at zero since covid-19 began in Q1 2020, causing an easy flow of money and credit in the economy. This is a stimulative stance from our policymakers; however, interest rates can’t stay at zero forever.

Interest rates, like inflation, have a material effect on nearly every asset class. Market interest rates are also used for valuation of future company cash flows, and low rates = higher valuation. If interest rates rise, your US growth equity holdings may suffer, along with long duration fixed income, and real estate – as borrowing costs increase.

/ US dollar

The US dollar is an important gauge of global market dynamics. The dollar in 2020 was a less circulated headline, but the US currency importantly fell over 7% against its global peers. This was due to a couple of factors:

• The US government is spending more than it is earning, partially due to issuing stimulus programs while lowering corporate and individual tax revenue. This is causing a growing federal deficit. This makes the US less creditworthy, among other things, and has depressed the USD.
• The US is spending more overseas for goods than is receiving in income

The US dollar, like interest rates and inflation, has a material impact on multiple asset classes that are popular among investors today. If the dollar continues to weaken against its foreign peers, look to see continued appreciation in cryptocurrency, gold/silver, international & emerging market securities, and small companies over large companies.

Takeaway

We believe that 2021 will be a defining year for all three of these variables. We continue to be positive on profitable, growth focused equity investments and the high yielding areas of credit markets for the long term.