Same Coke, Smaller Cans: 2021's Story Of Inflation

Despite cries of “overvalued” from pundits along the way, the S&P 500 ended last year nearly 60% higher than its spring 2020 lows, hitting another all-time high.

It was hard to understand the rapid S&P 500 growth against the backdrop of 10% unemployment and thousands of pandemic deaths last year. Things were bad societally and economically every way you looked at it.

But what has been proven again and again over history, is that stock prices moves prior to economic data. Hockey great Wayne Gretzky famously said, “I skate to where the puck is going, not where it has been”. And so does the stock market.

In 2021, the economic reopening began, and consumer prices caught up quickly:

·         Homes across the nation rose to their highest levels, ever

·         Lumber prices rose 400% year-over-year

·         Coffee prices rose 15%

·         CA Minimum wage is $14/hr, but restaurants can’t hire anyone for less than $17/hr

Will companies bear the higher cost of supplies and wages? Certainly not.

In April, Coca-Cola CEO James Quincey said “there's pressure built up for '22, and so there will have to be some price increases…We intend to manage those intelligently, thinking through the way we use package sizes”.

Clorox, Whirlpool, General Mills, and Smuckers also announced they intend to raise product prices in 2021.

Inflation is easy to understand in the short run, but difficult to grasp the magnitude of over time. At 3% inflation (the long-term average), a shopping cart with $100 of groceries today would only cost $103 next year. But in 30 years, it would cost $242 for that same order. By definition, inflation destroys the purchasing power of your cash.

Stocks have historically been the best way to preserve the value of your money. They’ve been a very effective long-term hedge against inflation, growing an average of 6% above inflation rates since people started measuring this stuff in the 1930s.

In theory, it’s simple: own the companies that are raising the prices.

In practice, it’s not: stock prices can swing wildly in the short run, tempting investors to sell several times over a lifetime. In “Stocks for the Long Run”, author Jeremy Siegel correctly pointed out “Fear has a far greater grasp on human action than the impressive weight of historical evidence.”

My dad has always said, “stocks help you eat well, bonds help you sleep well”. With inflation clearly resuming, the key to eating well down the line is to keep feeding your portfolio a healthy diet of stocks today.