Way back, when radio disk jockeys played 45-rpm vinyl singles, the A-side of a disk was the song the record company was promoting and the other side – the flip side – held a song that sometimes had an equal or greater impact. For instance, the flip side of Queen’s We Are the Champions was We Will Rock You.
When it comes to the economy and financial markets, flip sides can have significant impact, too. For example:
The flip side: Concern that share prices may not be sustainable. “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior…this bubble will burst in due time…,” wrote asset manager Jeremy Grantham of GMO in January 2021.
The flip side: Vaccines may not be as effective as many anticipate for two reasons: 1) Some Americans are reluctant to be vaccinated, and 2) Vaccines may not be effective against all strains of the virus.
That seems particularly important since employment gains have slowed. Last week, Carleton English of Barron’s reported, “All told there were 20.4 million workers receiving benefits under programs for the week ending January 23, a 2.6 million increase from the prior week. At this time last year, there were 2.2 million workers receiving benefits.”
The flip side: Too much stimulus could cause the economy to overheat, lead to inflation, and cause the Federal Reserve to raise rates. The bond market has already been pushing rates higher. Last week, the yield on 30-year U.S. Treasuries rose above 2 percent for the first time since February 2020.
The flip side: While many agree U.S. infrastructure needs repair, the cost may be paid through higher taxes. There is ongoing debate about whether tax increases impede or accelerate economic growth, according to Jim Tankersley of The New York Times. In addition, government spending of this type is another form of stimulus, which could heat up economic growth.
Last week, Colby Smith of Financial Times reported numerous economists have increased U.S. gross domestic product (GDP) growth estimates for 2021. Estimates ranged from 5.9 percent to 6.3 percent.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
INNOVATIONS CAN BE DIFFICULT TO VALUE. Throughout history, inventions and new ways of doing things have changed the world:
It would have been difficult to understand or estimate the long-term value of these innovations. It’s possible some of today’s innovations could have similar impact. One is machine learning. Machine learning uses algorithms to turn a data set into a model that can improve our understanding of a topic. For example, machine learning is being applied to:
Weekly Focus – Think About It
“There is no recipe, there is no one way to do things – there is only your way. And, if you can recognize that in yourself and accept and appreciate that in others, you can make magic.”
—Ara Katz, Entrepreneur
Daniel J. Murphy, CFP®
Murphy Wealth Management Group
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