March 03, 2022

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TOGETHER WITH

Good day to you. Can you guess which of the following nations is the most indebted (i.e., highest debt-to-GDP ratio) in the world? a. El Salvador, b. France, c. Japan. Follow the wave 🌊 below for the answer.

Here are the topics covered today:

The economy is up, so should inflation get us down?
Commodities are hot, who should care?
Budgeting for the unexpected

MARKET OUTLOOK

The economy is up, so should inflation get us down?

Yahoo Finance recently belittled inflation fears, calling them “exaggerated.” Meanwhile, contrasting viewpoints from The Wall Street Journal and others continuously point to the red-hot, record-level pricing increases we’ve been seeing. So, which end of the spectrum is right?

Take the good with the bad

No matter how despairing the news might make the current inflation rate sound, keep in mind that even when inflation has been as high or higher than it is right now, the stock market has held up pretty well in the past.

The average returns for the S&P 500 Index from 1947 to 1976 were 9.4%—that’s basically the long-term average over the past 90+ years. Eight out of the 17 years had double-digit returns. As shown below, nearly one-third of the time, returns were more than 20% when inflation was the highest.

Inflation and S&P 500 Index from 1947 to 1976

Source: awealthofcommonsense.com

For additional perspective, the IHS Markit U.S. Composite PMI, which measures economic trends in the manufacturing and service sector, rose to 56.0 in February 2022 from an 18-month low of 51.1 in the previous month.

What’s more? Gross domestic product (GDP) growth is expected to hit its best percentages since 1984, not to mention that unemployment is at multi-year lows and wage growth is growing more rapidly than the inflation rate (5.7% since January 2021).

IHS Markit Composite PMI and U.S. GDP

Source: IHS Markit, U.S. Bureau of Economic Analysis

The takeaway

People experience inflation on a visceral level, and that gives it outsized influence. In fact, inflation makes people unhappy in ways that are disproportionate to the actual concerns economists have about inflation.

But when we add in anecdotal observations like the low unemployment rate, strengthening labor market, more homeowner equity, more retirement investing, heightened personal savings, and just overall healthier household balance sheets, things might not look so bad.

Maybe this isn’t the end of times, but rather a temporary storm that can be weathered with a little perseverance and planning.

INVESTING

Commodities are hot, who should care?

Buying into commodities like corn, aluminum or grains doesn't sound like the most glamorous or accessible investment for the average investor. But their relevance remains and maybe now more than ever.

Assets are flooding into raw material funds at the highest rate seen since 2007 due to a strengthening desire by investors to hedge against inflation, but should you get involved?

A few raw basics first

What is it? A commodity is a basic physical asset, often used as a raw material in the production of goods or services. Broad categories of commodities include metals, energy, livestock and meat, and agriculture.
The spot market is used for commodities that will be paid for and delivered immediately. Getting physical delivery of your commodity that would require you to arrange for transportation and/or storage facilities can be a costly and complicated affair.
The futures market is for commodities that will be delivered at some point in the future. A futures contract represents an agreement between two parties to trade an asset at a defined price on a specified date in the future. Since most futures contracts trade on an exchange such as the New York Mercantile Exchange (NYMEX), trading commodity futures usually offer greater liquidity and flexibility than trading them in the spot market.
The goal is to seek profits. The commodities market is classically hogged by large institutional investors and speculative players with the capital to do so. Most commodities traders are seeking a profit and don’t wish to take actual delivery of the commodities they are trading.
It's not like holding stock because you can't hold a futures contract forever if you wanted to. They all have an expiration date.
Oh, and "there's an ETF for that." Broad-based commodity ETFs now hold over $21 billion in assets, putting the commodity ETF market value at its highest point in well over a decade. Commodities such as crude oil or natural gas are almost impossible for even an institution to get their hands on, which is why many ETFs turn to the futures market to get their exposure. An ETF must "roll" from one futures contract to the next before expiration.

The current situation

As we continue to experience global supply disruptions and shortages and increasing demand for commodities, we are seeing more contracts trading into what's called backwardation, an indication of scarcity.

Simply put, it's when the current or spot price of an underlying asset is higher than prices trading in the futures market. It suggests that the spot price of an underlying asset is too high and should fall in the future, a bearish indicator most of the time. It favors short investors and is often caused by supply shortages like we’re seeing now.

Should you care?

Yes, it's good to be aware. Their values and prices can play a big role not only in developing economies and inflation as we continue to experience global supply disruptions, but also across markets. Their impact can find its way into everything from earnings, personal income, broad market returns, and even portfolio allocations because—believe it or not—many of your retirement accounts may have some commodity exposures in them too.

🪙 Take the below micro lesson investing in commodities to learn more. Earn 10 Dibs (gold coins on Finny) for every correct answer!

Investing in Commodities

Investing Basics

8 mins

MONEY TIPS

Budgeting for the unexpected

The whole thesis behind budgeting is to be prepared and to know where exactly your money is going each month. That’s great and all, but what about all the unexpected yet inevitable expenses life can throw at us without warning?

Budgeting is a great foundation, but we often forget to add a box to it—the “unexpected” line item. It might be fair to ask how you could financially account for what you don’t see coming, so here are a few practical pointers 👉

Your first line of defense: deepen your emergency fund. The rule of thumb is to save about 3-6 months of expenses in the event of an unexpected emergency. Try to get to 6 months' worth of expenses to give yourself a cushion.
Account for irregular expenses. Take a look at your spending over the last 12 months and take inventory of all your irregular expenses (i.e., gifts, kid's stuff, seasonal expenses like landscaping or Halloween decorations, etc.). Then, divide that amount by 12 and set aside that amount monthly so you're better prepared when they come up.
Account for potentials and overlooked expenses. So, maybe your car is doing just fine right now, but it's 19 years old after all and you never know when the transmission might go out. That’s a potential expense and one that's probably not budgeted for. It may never even happen, but a surprise expense like this could derail a budget if not accounted for before it even happens. Take the time to make your best educated guesses here.

📊 Related lesson on this topic:

Budgeting Basics

Budgeting & Saving

6 mins

🔥 TODAY'S MOVERS & SHAKERS

Kroger (+10.7%) saw earnings growth despite certain costs that have continued to climb for some categories of food that it sells
Best Buy (+8%) despite reporting sales that fell short of expectations (due to supply shortages and staffing challenges)
Ford (-3.1%) will split into EV and legacy vehicle businesses to allow the EV business to capitalize on positive sentiment but analysts weren't sold on all aspects of the plan
SoFi (-5.5%), the digital financial firm, despite reporting narrower loss than expected and beating on revenues
Dollar Tree (+6.2%) despite mixed earnings and weaker than expected future outlook

This commentary is as of 9:00 am PDT.

🌊 BY THE WAY

Answer: It's Japan with a debt-to-GDP ratio of 257%; France is at 116% and El Salvador is at 84%. The higher this ratio, the higher the risk of a country defaulting on its debt. Visualizing the state of global debt, by country (Visual Capitalist)
📉 The 10 stock and bond funds with the biggest Russia exposure (CNBC)
🛒 ICYMI. Money mindset—the 1.4x purchase factor (Bites)
Finny lesson of the day: Gold is another one of those commodities making headlines. Here's an intermediate-level lesson on the relationship between gold and the USD:

Gold & the US Dollar

Investing Basics

6 mins

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The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The editorial team: Chihee Kim, Austin Payne. Today's Movers & Shakers is brought to you by Ashu Singh.

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