One of the oddities of the pandemic has been the amount of money individuals have been able to save.

While acknowledging lower wage workers have been hit disproportionately hard, the U.S. personal savings rate, for example, is at the highest levels in more than 70 years.

That should bode well for consumer spending as the economy reopens and pent-up demand is satisfied to varying degrees.

That spending should lead to stronger economic growth and could also fuel inflation. Here are some ideas how investors can prepare for those scenarios.


by Michael Batnick, Direct of Research, Ritholz Wealth Management

We just witnessed the only recession in the history of this planet where the personal savings rate hit a 50-year high.

This chart, which I think is the most important one from the last decade, comes from J.P. Morgan’s Guide to Retirement.

During a recession, the economy contracts, and people lose their job. And when they lose their job, they lose the ability to save money. But this was no ordinary recession.

Yes, people lost their job, but they didn’t lose their income, thanks to a fiscal bazooka like we’ve never seen before.

And when the economy closed, their spending declined to a fraction of what it otherwise would have been. Add this all up, and you get this amazing result where the personal savings rate explodes.

Mathew Klein at Barron’s shows that Americans have saved $1.8 trillion more than they would have had we not experienced a pandemic. Wow. Just wow.

The saving glut will lead to a spending boom which might lead to inflation. In 2008, the stimulus was 5.5% of GDP. Today it’s 9.1% of GDP.

Another obvious difference is that the stock market is at an all-time high. So are housing prices. And as I already mentioned, so is the personal savings rate.

When you combine all this with an inevitable spending boom, the danger of an overheating economy should be taken seriously.

I do think consumer prices are going to rise. In fact, I would be surprised if they don’t. Vacations, for example, forget about it. Hotels and Cruises haven’t done any business in the last 12 months.

They’re going to see demand like they’ve never experienced, and I expect prices to reflect that.

But I think that this is one-time spending boom will lead to a temporary rise in prices which will settle back down as things get back to normal.

Unfortunately, I doubt the stock market will wait to see what happens. If interest rates rise alongside consumer prices, it’s possible that we to get the chance to buy at much lower prices.

And if the market overreacts, I think it will be a wonderful opportunity for those who can look past it.

What might cause me to reconsider? It’s all about wages. If we see a sustained rise in wages, then I’ll start to worry.

We can have inflation without having hyperinflation. Prices can rise without the dollar becoming worthless.

As far as your portfolio goes, you have to put yourself in a position to survive a wide range of outcomes. This isn’t just good advice for today. It’s always true.

If we learned anything from last year, it’s to keep an open mind. Even if you know what’s going to happen, and let’s be clear none of us do, we still might get the trade completely backwards.

So focus on what you can control. Why are you investing? How much risk can you stomach? What will you do if stocks fall? What will you do if they don’t?

Mentally preparing for the risks before they happen is our way of pre-coping.

It’s better for our sanity to plan for the worst and have an upside surprise than to be oblivious to the risks and get blindsided when it happens.

I take comfort in knowing that inflation is now the headline risk, and when’s the last time we saw the big risk coming?