October 22, 2021
Good morning,
Futures (remember, all alone “Futures” denotes the S&P 500 kind, any other futures contract requires specific description – it’s the king and the convention). Anyway, Futures are hovering around unchanged as the overnight session rolls into the cash market open. This, following its 55th record close of the year yesterday.
Stocks have risen lately on strong earnings and have shaken off slowly rising yields (UST-10yr now at 1.68% for those keeping track at home), and concerns about inflation and supply-chain problems that threaten the Reopening 2.0 economic recovery.
The current rally following September’s correction has broadened globally with enough breadth improvement to suggest it may have legs into year end. It’s unlikely to be a barn-burner affair but a slow-steady incrementally higher climb is 2yr old bull market behavior.
Inflation. It’s real and personally, I have been struggling with the equity market’s apparent lack of concern. Here’s one possible explanation:
Whenever we have a burst of inflation, many people (including the Fed) argue that if one takes out some special factor (supposedly transitory) like energy, food, vehicles, shelter, etc., then inflation is not really bad. It doesn’t work well with inflation to look at medians to see how strong it is. With inflation, if one has to pay 30% more to heat or cool one’s home, there is less money left over for other things, so of course, the other things will go up less. But the main point for me is that inflation eats up income and reduces the purchasing power of the U.S. dollar, so any inflation is important, even if it later proves transitory.
While it has downticked slightly, inflation pressures remain fairly high. The ISM Price Index confirms, and supplier deliveries remain elevated. Wages also suggest upside pressure on inflation. Since 1965, CPI inflation and weekly wages have both grown an average of 3.9% on a year-to-year basis. With weekly earnings now growing 5.8% from a year ago, it is not surprising to see CPI inflation rising up close to that, and well above the Fed’s 2% target.
However, there are signs that inflation will ease later. The surge in disposable personal income growth in 2020 has now turned to below average growth in 2021. Supply problems could still last a while, but slowing income growth should begin to slow demand pressures on inflation fairly soon
– Ned Davis
In other words, the market is possibly willing to discount the current inflation spike as long as it can see slowing demand pressures on inflation sometime ahead.
Be well and have a good weekend,
Mike