Inflation

Long before policymakers’ extreme response to the COVID collapse, we feared that the Fed’s interventions were suppressing important signals from the stock and bond markets. But we now suspect that hyper-expansionary policies are suppressing price signals from the “real” economy as well.

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The Fed is hell-bent on generating inflation of 2% or higher in an over-supplied world that we think should probably be experiencing mild deflation. Their success or failure at this mission will be critical for asset allocators. For equity managers who must remain fully invested, however, the more important question might be not whether the Fed can generate higher inflation, but where.

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Where inflation goes next will be primarily determined by the probability of a recession.

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In the aftermath of the Great Financial Crisis, we reminded investors that it would be historically unusual for the thematic leaders of a bull market to repeat as the winners of the subsequent bull.

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Two words sum up the past decade pretty nicely: U.S. Exceptionalism. The superiority of U.S. assets really comes down to the unique combination of growth (U.S. stocks), yield (U.S. bonds), and relative safety (both U.S. stocks and bonds).

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We put together an Inflation Scorecard that monitors two critical sets of inflation drivers: demand pull and cost push. The qualitatively-adjusted score is much closer to a neutral reading than the mechanical composite (which suggested quite a bit more disinflationary headwind).

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Just a few months ago, Fed Chairman Jerome Powell boasted a reputation as a straight-talking, sound-money banker.

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Wage inflation should accelerate in the months ahead, oil could bounce from its oversold low, and college textbooks might double in price before the fall semester. No problem…

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The latest CPI numbers missed market expectations. The problem is not with the actual CPI numbers, but merely the fact that market expectations are still a tad too high. More disconcerting is the cool trend in housing inflation.

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The year-over-year headline number was in line with market expectations but the month-over-month increase missed market consensus (0.1% vs. 0.2% expected). All else being equal, there is a good chance CPI might have peaked for 2018. A stronger dollar is disinflationary while the short term impact of tariffs is higher import prices.

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After yet another benign figure on wages for June, the idea that inflationary pressures might be a problem for the stock market seems far-fetched.

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Headline and Core CPI figures hit estimates right on the nose in May, continuing the trend of modest but not outrageous price increases. Energy prices have boosted headline CPI while core CPI continues to be driven by services. With both of the Fed’s mandates pretty much accomplished, appreciate this rare window of time.

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Consumer Staples has historically been the sector most resistant to intermediate stock market corrections, exhibiting an average “downside capture” of less than 40% during all such declines dating back to 1989.

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The first quarter S&P 500 earnings “beat” rate stands to be the highest in history, as any CEO with a pulse has learned to lower the hurdle.

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For the first time in this bull market, defensive stocks failed to provide any semblance of defense during a market correction.

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The setback that began in late January qualifies as the sixth intermediate correction of the current bull market, where “intermediate” is defined as an S&P 500 loss ranging between 7%-12%...

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The headline and Core CPI numbers for January both came in hotter than expected. Despite the resurrected interest and concerns about inflation we still haven’t caught inflation fever. Because of the narrative (correct or not) look for increased volatility surrounding inflation announcements.

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So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?

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The latest Core CPI number beat expectations but the yield curve flattened. The market shows more conviction about the Fed’s rate hikes than longer term inflation. We recommend patience and we don’t believe missing out on the first few months of higher inflation will cost us dearly.

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While our Group Selection (GS) framework hasn’t yet warmed up to commodity-oriented industries, our macro work suggests perhaps it should.

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