Do We Need to Fear Inflation? - Holdun

Market Summary

More upbeat earnings, more market rotation, more tech woes.

True to form, market participants continued to favour value and cyclical stocks despite a strong earnings season for many tech names. Inflation fears were dampened by a less than impressive jobs report, driving interest rates lower.

For the week, the Dow rose 2.7%, its biggest weekly percentage gain since March. The S&P 500 gained 1.2%, while the Nasdaq shed 1.5%.

A seemingly endless stream of upbeat Q1 earnings bolstered stocks. The S&P 500 earnings have increased by an estimated 50% from a year ago, which would be the highest growth rate since the first quarter of 2010.

Fridays Jobs report numbers of 266,000 new jobs in April fell well below the 1 million jobs expected. The U.S. has now recovered 63% of jobs lost from the pandemic, with the unemployment rate sitting at 6.1%. While the numbers continue to move in the right direction, a considerable slow down despite the economic reopening highlights the difficulties in the labour market from here on in as worker shortage in specific sectors and wage inflation may curtail future employment gains.

While the report did little to lift labour markets, it helped alleviate some concerns over rising inflation. Bond valuations and many growth names jumped as a result.

Equities

1.3%S&P 500

Groundhog day for markets as another knock-out week of earnings led to more tech sell-offs.

Tech stocks took a notable dive mid-week following comments from U.S. Treasury Secretary Janet Yellen stating that rate hikes may be needed to stop the economy from overheating. These growth names staged a recovery later in the week as Yellen downplayed her earlier comments. The disappointing jobs report on Friday also helped to quell inflation fears which have weighed on many of these growth names in recent times.

Commodities

3.6%GOLD

Supply bottlenecks and post-pandemic demand have sent commodity prices soaring to their highest levels in almost a decade.

Metals, food, and energy are at the fulcrum of any growing global economy. Throw some supply-side problems into the mix and you have a perfect storm, resulting in considerable price inflation.

Lumber has more than tripled in price since last year. Copper has jumped almost 40% since the start of the year and is now up over 100% from its pandemic low point. While the supply-side contraction will likely be short-lived, this high demand, low supply environment looks set to keep commodity prices elevated over the near term.

Bond Yields

1.56%US 10Y TREASURY YIELD

U.S. Treasury yields fell to two-month lows on Friday after data showed a much smaller-than-expected jobs gain in April. The 10 Year Treasury now sits 20 bps below the inflation-fueled highs of 1.78% reached on March 30th.

Crypto

28.8%ETHEREUM

Ethereum (Ether), the world’s second-largest Crypto, moved above the $4,000 mark for the first time this week. Ether continues to emerge from Bitcoin’s shadow as more and more investors look to other cryptocurrencies for returns.

best8.9%Energy

Worst1.2%Consumer Disc.

Market Outlook

With commodities continuing to soar and Washington debating even more stimulus, inflation is the market buzzword of choice.

The Fed is insistent that the recent spike in commodity prices and wage pressure will be short-lived. They also have continued to highlight their willingness to let inflation run above target for a period as the economy revives.

Despite the leading indicators signaling a pick-up in inflation, many market participants are now making a case for a more benign inflation outlook. Traders have trimmed bets on rate hikes, while Goldman and Pimco have both softened their inflation outlook.

While fiscal stimulus, an even more supportive Fed policy, supply-side contractions and pent-up demand will likely bring near tern inflation. Secular trends such as technological innovation and demographics will ensure these inflation figures level out over the medium/long term.

In short, inflation is likely to rise above the anemic levels it has been anchored to over the past decade, but despite what some doomsday economists would like you to believe, higher inflation doesn’t mean we are destined to return to the painful stagflation of the 1970s.

HOLDUN