Goodbye Masks, Hello Volatility

Friday Reflection | May 14, 2021

In the United States, COVID and mask mandates appear to be on the downswing, while volatility and inflation are on the upswing. Yesterday’s CDC announcement marked a major milestone, but the progress toward post-pandemic normalcy was already largely priced into the market.¹ Data showing a near-term uptick in inflation was not. The market reacted by retreating from recent highs, with the S&P 500 dropping early in the week and finishing with a net decline of -1.4% by Friday.

The economy has recovered substantially from the lows of last year, but this week offered reminders that there are risks to market resiliency beyond the pandemic.

Higher prices typically result from an increase in demand or a shortfall in supply. In recent weeks, we spotlighted how scarcity has led to price spikes in lumber, microprocessors, and blockchain-based digital artwork. This week, scarcity impacted gasoline availability and prices on the East Coast. The reason, unfortunately, was more malicious than simple supply chain adaptation issues. Colonial Pipeline was the victim of a cyberattack. The company, which transports 2.5 million barrels a day or 45% of the East Coast’s supply of diesel, petrol, and jet fuel, was forced to pay a $5M ransom in cryptocurrency to unlock their systems and restore service.² The shock reminded companies (and individuals) about the critical importance of cybersecurity.³ The resulting jump in gas prices is widely understood as temporary, but the timeline for the broader spectre of inflation is not so obvious.

Prices in the US are increasing on more than just gasoline and the aforementioned commodities. The Consumer Price Index (CPI) gained +0.8% in April, exceeding economists’ forecast for a +0.2% rise. With this increase, the CPI stands 4.2% above the levels from one year ago.⁴ The Fed’s stance remains that current inflation is transitory, and they are committed to low interest rates until data shows material progress on employment and wage growth. Investors are growing concerned that the Fed’s tolerance for inflation could wane and force rates to rise earlier than their stated 2023 timeline. We expect this question to continue weighing on markets in the near term. In the meantime, the arrival of at least transitory inflation after a decade of anemic price growth still comes as a shock to markets

The pandemic has been the primary force driving markets for the past year. Thankfully, the virus has receded from headlines in recent weeks as vaccination progress has been made. In the US, daily cases have fallen to roughly one-tenth of the daily records from early this year. Nationwide hospitalizations are down to levels not seen since last October. And although the pace of vaccinations has slowed significantly, more than a million Americans a day continue to get a jab and almost half of Americans are fully or partially vaccinated.⁵

The Centers for Disease Control and Prevention updated its mask-wearing guidance this week, confirming that fully vaccinated people can safely gather in groups indoors and outdoors mask-free. California announced that they are reviewing the statewide mask mandate in light of new CDC guidelines. A renewed COVID surge remains a risk to the economic recovery, albeit a declining one

Beyond simple changes to portfolio allocations, periods of investment or societal uncertainty can also lead to reconsidering other aspects of our lives. Millions of Americans moved to new houses during the pandemic in pursuit of more space, while others have pivoted to home-schooling, Zoom gatherings, and a myriad of changes they couldn’t have previously envisioned. Another big transition is the decision of when to retire. Our partner Sam Wood-Bednarz wrote an upcoming article for Berkeley Hills Living Magazine about how that decision has been influenced by the pandemic, and how understanding your values in addition to your financial circumstances creates a more fulfilling transition.

Investors react to moments of volatility in varied ways. For some, it elicits the need to take action to alleviate their discomfort, even if logically they know it is likely temporary. For others, it is a moment to look for opportunity as emotions drive market prices more than fundamentals. For most, market volatility is merely noise on the longer-term journey of investing. We counsel clients to remain calmly rooted in a plan that is built for the trajectory of their life rather than the fleeting headlines and fluctuations of the current market moment

¹ COVID-19 Guidance for When You’ve Been Fully Vaccinated CDC.gov

² Colonial Pipeline Said to Pay Ransom to Hackers Who Caused Shutdown WSJ

³ Ransomware took down the Colonial Pipeline. You could be at risk too. CNN Business

⁴ Consumer Price Index – April 2021 U.S. Bureau of Labor Statistics

⁵ See How Vaccinations Are Going in Your County and State NYTimes