Infrastructure and Inflation
President Biden just signed the much-debated infrastructure deal, and we’ve been getting questions on what is in it. In the short term, some of the infrastructure funding will go immediately toward clearing port and transportation bottlenecks, which might help improve supply chain issues.
Though it could be years before you or I drive across a new bridge or highway funded by the bill, some of the maintenance funds could get used in spring construction blitzes.
Since the job market is already tight, the economy isn’t likely to see an immediate surge in hiring due to infrastructure spending; however, multiple reports suggest about 800,000 new jobs could be added by 2030, though many of them will be temporary rather than long-term jobs.
Economists don’t think inflation is likely to increase due to the slow pace of spending, though the deal is projected to add $256 billion to the federal budget deficit over the next 10 years.
Bottom line, analysts project long-term benefits to the economy in lower business costs, increased labor force participation and improved competitiveness.
Inflation might not be as temporary as the Federal Reserve would like it to be. Prices are up all over, and folks are understandably upset at paying more at the grocery store, gas station and most everywhere else.
Many analysts hoped that data blips, supply chain clogs and other pandemic-related disruptions were creating a temporary spike in inflation that would resolve soon.
However, inflation has remained stubbornly high.
In the U.S., prices have increased 6.2% over the last 12 months — the biggest spike since November 1990. And you can see in the chart that some categories measured by the Consumer Price Index (CPI) have soared by much more.
Since the Fed’s goal is to keep long-term inflation around 2% (and that’s what we’ve experienced this century), folks are concerned that “temporary” inflation is lingering longer than we want.
So, are prices going to continue to rise in 2022? That’s likely, but how much, how fast, and for how long depend on a lot of global factors, including whether the Fed raises interest rates or takes other actions.
Will Your Taxes Go Up in 2022?
That’s the question of the month on Capitol Hill as lawmakers debate the Build Back Better deal that could come with tax law changes.
We don’t know when (or if) the bill will be passed, nor what will be in it. Things are getting taken out and put in (or back in) almost daily. I’m watching closely and I’ll update you when we know what’s likely to happen.
Individual Stock Risk
When we think of a drop in stocks, we think of something big going on in the economy that causes a swift market drop impacting all stocks at once. Two recent drops were the financial crisis in 2008-2009 and the start of the COVID-19 pandemic last March (depicted by the red arrows on the graph below).
But general market risk is not the only risk that stocks have. Individual stocks are mostly driven by their earnings which are released every quarter. Big drops or gains after quarterly earnings are tied to how big of a positive or negative surprise the earnings were, not necessarily on the actual revenue and income numbers.
Two recent examples of this are Zillow and Peloton.
It wasn’t too much of a surprise that Peloton’s numbers would be down in their latest quarterly earnings release — after all, people are going back to the gym. But how badly they missed their revenue numbers was a surprise. To throw salt on the wound, they gave a really bad forecast by saying that their projected revenue would be down $1 billion, or 25%, from their previous forecasts.
The stock was swiftly punished — dropping from $86/share to $55/share on November 4th. A 45% drop in one day.
Another recent example is Zillow. In their latest quarterly earnings report they not only announced poor income numbers, but communicated that they were pausing their iBuying business unit. iBuying was a strategy of using data to analyze when the best time to buy or sell a home is and to make it as simple as possible for sellers. They had trouble getting their algorithms to generate a profit and decided to abandon ship.
It could also be a prolonged company decline. In 2000, Palm was worth $53 Billion and had a higher company valuation than Apple, Amazon and Google combined. It was sold to Hewlett Packard in 2010 for 1.2 Billion.