Last Week’s Markets in Review: Where’s the Inflation?

Global equity markets rose rapidly following the Friday release of the U.S. unemployment situation, which showed that the U.S. unemployment rate fell to 13.3%, despite expectations for the rate to increase to nearly 20%. In the U.S., the S&P 500 Index propelled to a level of 2,930, representing a gain of 3.57%, while the Russell Midcap Index pushed 4.83% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 5.52% over the week. Moreover, developed and emerging international markets returned 0.90% and -0.52%, respectively. Finally, the yield on the 10-year U.S. Treasury rose modestly, finishing the week at 0.69%.

Should investors worry that we’re entering a new inflationary period with the U.S. federal government and central bank pumping up to $10 trillion in relief by some estimates into the U.S. economy? As it currently stands, the federal government is financing a large portion of the social and economic programs created in response to COVID-19 by printing more greenbacks than any time since World War II. This has led many to speculate that inflation, similar to that of the 1970s, may be right around the corner.


Yes, the money supply has grown significantly, but an equally important driver of inflation expectations that has not increased is the velocity of money. The velocity of money is simply the rate at which dollars exchange hands from one person (or business) to another, and a higher velocity has been associated with higher inflation. As you can see in the chart above, the velocity of money has fallen gradually since the early ’90s, and it appears that several structural factors have contributed to this decline, many of which dampens the potential for inflation.


Consider the consumption behaviors of the Greatest Generation, often viewed as fiscally conservative. These behaviors were formed in the aftermath of the Great Depression when many of the Greatest Generation was still in diapers and were unlikely to remember the worst of that period’s economic fallout. Nonetheless, the horrific economic climate of the lates 1920s and early 1930s help dictate their consumer behaviors for a lifetime. A similar argument can be made about the lasting impact that the Great Financial Crisis of 2008 had on today’s consumers, as household debt levels have consistently decreased while savings rates have steadily risen since then. This is a structural impediment to higher inflation, as these spending habits are unlikely to change. The events that unfolded in 2008 are responsible for another factor weighing on potential inflation: regulation. Many of the rules put in place in the aftermath of the Great Financial Crisis of 2008 placed stricter capital requirements on financial institutions. Onerous capital requirements limit the potential for loan growth and ultimately weigh on the velocity of money. Finally, the young spend, while the old save, and America is getting older.

The chart below, from J.P. Morgan Asset Management, shows the growth in the working-age population by decade, which is expected to decline as it has over the last decade. This, too, should act to help control inflation over the next decade.

While the inflation outlook is highly unknown, and we might argue that there is more of a risk of deflation over the short term than there is of inflation if prices decline as a result of lower demand brought on by declining levels of consumer spending, investors can take steps within their respective portfolios to hedge a potential spike in the inflation rate without meaningfully altering their desired risk to return profile. In other words, investors with a conservative risk tolerance can find lower volatility assets to help hedge inflation risk, while the inverse is true for those with an aggressive risk tolerance. For instance, a conservative investor can allocate a portion of their portfolio to TIPS, or Treasury Inflation-Protected Securities, which are fixed income securities issued by the U.S. government. The coupon payment is a fixed percentage rate determined at issuance, however, the face value of TIPS increase or decrease based on the level of inflation. In recent years TIPS have exhibited minimal volatility, akin to that of traditional U.S. Treasury Notes, and thus can add stability to a portfolio even if inflation expectations remain subdued. Conversely, investors with a higher tolerance for risk, who may be concerned about the inflation outlook, can look to asset classes such as precious metals, Real Estate Investment Trusts (REITs), and last but certainly not least, U.S. Large Cap equities.

Inflationary periods are typically fairly short, but as many of you may remember they can last for as long as a decade as they did in the 1970s. When exactly inflationary bouts strike, and then dissipate, can be highly uncertain and very difficult to predict. For this reason, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.

We recognize that these are very troubling and uncertain times and we want you to know that we are always here for you to help in any way that we can. Stay safe and stay well.

Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 6/5/20. Rates and Economic Calendar Data from Bloomberg as of 6/5/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.

Important Information and Disclaimers

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss. Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs. Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.

The prices of small company and mid-cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.