The Biggest Question You’ve Asked This Year

July 2021 | Victoria Bogner, CFP®, CFA, AIF®

Back to Market Commentaries

Throughout 2021, we’ve seen the US economy transition from lockdown mode to the floodgates of demand bursting open. Vaccinations became available to any adult who wanted one, and the masks I paid $5 for are now on clearance for 25 cents. All good news, right? With the economy opening and the gears greased by high demand and even higher liquidity, many of my clients have been asking my thoughts on one thing in particular: inflation. While stocks continue to rise for the most part, 2021 has seen Treasuries off to one of their worst starts in years with the 10-year Treasury bond down over 4% in the first quarter. The main culprit? Rising yields triggered by the fear of inflation. 

Such a speedy recovery from the pandemic has created pockets of disruptions, some of which you may have personally experienced. My husband, who works as an electrical design engineer, is acutely aware of the global chip shortage affecting the consumer products he designs. The trickle-down is having a huge effect on vehicles with a shortage in new cars. Rental car shortages are something we experienced on our recent vacation. Flights and lodging were relatively cheap. Our rental car, however, cost more than both of those aforementioned items combined. We were lucky to find one at all. Then there are building material shortages for those trying to build homes or renovate. And with oil prices on the rise, consumer staples could become more expensive as well. 

Inflation in and of itself isn’t a horrible thing. A slow, steady rise in prices over time is healthy for a consumer-based economy like ours. But too much too soon can wreak havoc. Ironically, for stock investors and bond investors in particular, the main fear isn’t inflation itself as much as what the Federal Reserve would do to counteract it: raise the federal funds rate, which could ultimately put pressure on financial markets. 

When rates move higher, bond prices go lower. It’s an inverse relationship that we’ve seen play out so far this year. As the economy recovered from the pandemic-induced shutdown, a little inflation was expected; however, higher than expected demand, record low supply, and trillions of dollars sloshing around in stimulus mixed together to create some inflation numbers that were higher than what anyone expected. The monthly changes from the prior year are 4-5% each month for the past 3 months. 

Does this mean the Federal Reserve is going to raise rates anytime soon? Are those fears founded? A few months ago, the Fed was firmly in the position that inflation would be temporary but as demand and supply evened out, it would go back down toward their target. In the most recent June meeting, they took a much humbler tone. The Fed now acknowledges the upside inflation risks and Chairman Powell said they have started to talk about an eventual tapering of asset purchases. Instead of waiting through the end of 2023 to begin raising rates, it could happen as soon as the end of 2022. While it spooked the markets slightly, this week’s meeting was an important step. We don’t want the Fed to be blind to the uptick in inflation and the data that goes along with it. They did the right thing. They have to begin reminding investors that at some point in the future, asset purchases will stop and rates will go up. But I don’t envy them their job. Getting that timing right and doing it with a smooth glide path will be one gargantuan task. The Fed has created an exceptionally loose stance on monetary policy with some even insisting they went way too far. Now if we see the economy continuing to generate high GDP and inflation ticking ever upward, that loose policy will be out of lockstep with the fundamentals. In my opinion, the best thing they could do would be to set expectations early, often, and begin the tightening process sooner and slower. But they didn’t ask me. 

Meanwhile, even as 10-year US Treasury rates have moved higher on the Fed’s news, the challenge for conservative investors remains how to generate yield without being forced further and further out on the risk limb. Some ideas to consider are inflation protected bonds, which will theoretically experience some insulation from high inflation. Bonds with shorter time frames (aka low duration bonds) are less affected by rate moves than long-term bonds. And as long as you do your research, you could venture down into the BB-rated space if you’re willing to take a bit more risk. Of course, everyone’s situation is different so if you’d like advice specifically for you, give us a call and we’re happy to help.

Disclaimers and Notes

Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Advisor. Advisory services also offered through Affinity Financial Advisors, a Registered Investment Advisor, operating as McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.

Check the background of your financial professional on FINRA’s BrokerCheck.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into accounts the effects of inflation and the fees and expenses associated with investing. The Volatility Index, or “VIX”, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Individuals affiliated with this broker/dealer firm are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.

This is published for residents of the United States only. Registered Representatives of Cetera Advisor Networks LLC may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Not all of the products and services referenced on this site may be available in every state and through every representative listed. For additional information please contact the representative(s) listed on the site, visit the Cetera Advisor Networks LLC site at
We are Insurance licensed in AR, AZ, CA, CO, FL, IA, IL, KS, KY, LA, MD, MI, MN, MO, ND, NE, NY, OH, OK, OR, PA, SC, SD, TX, VA, WI, WY. CA Insurance License# 0G81128.

NOTICE: The information contained in this electronic message is confidential and intended only for certain recipients. If you are not an intended recipient, you are hereby notified that any disclosure, reproduction, distribution or other use of this communication and any attachments is strictly prohibited. If you have received this communication in error, please notify the sender by reply transmission and delete the message without copying or disclosing it.

© 2020-2022 Affinity Financial Advisors, operating as McDaniel Knutson Financial Partners.

Client Relationship Summary BrokerCheck Logo