Displaying items by tag: inflation

(New York)

The whole market—including advisors—has pretty much been panicking lately about to invest in what could be a period of high inflation. The duress is understandable considering we haven’t had significant inflation in decades. However, those trying to diversify into assets which are likely to thrive during inflation should look no further than the SPDR S&P Regional Banking ETF (KRE). The normally sleepy sector is surging this year, up 37% versus the S&P 500’s 11%. The reason why is simple: higher rates mean better earnings for banks, which earn the majority of the revenue from interest income.

FINSUM: If you think inflation is going to stay elevated, this is a great hedge. However, if it falls, it is easy to imagine regional banks tumbling in value.

(New York)

Bank of America put out a very refreshing outlook today, reminding investors of an asset that has traditionally thrived in times of high inflation. And no, it isn’t gold or other commodities. That asset is…small caps. BAML says that small caps, and value stocks as well, have traditionally performed well in high inflation environments, such as in the 1960s. According to the firm, “Our US Regime Indicator has shifted to Mid-Cycle, a phase where inflation is typically strongest. In this phase, small caps and Value have typically outperformed large caps and Growth - further supported by the profits recovery and economic rebound we expect this year. Small caps and Value stocks were also some of the best-performing assets during the inflationary period of the late 60s”.

FINSUM: History aside, we cannot really agree about the idea that small caps will thrive. Relative to large caps, small caps have a higher employment cost base because their employees are more often in the US. Their supply chains are more domestic too. That means all their costs will rise alongside their revenue. Take a larger multinational—Apple for example—most of its manufacturing and supply chain costs are offshore, which means it can enjoy rising inflation-driven revenue, but take advantage of lower inflation rates in its cost base.

(New York)

The market has been blindsided this week, with big losses. However, the 13th was great news for investors, as the market finally showed some resilience, rising considerably despite some more worrying inflation data (PPI). The 1%+ gains on the 13th are a distinct sign: investors are still willing to buy the dip.

FINSUM: Investors still seem to believe in the fundamental direction of earnings and the economy. Our opinion is that this bout of inflation is temporary, but even if it isn’t, it is a good sign that investors can see beyond the inflation numbers right now.

(New York)

Last week's jobs report was disappointing, to say the least, but bond market investors want to know what exactly this means for the recovery: Is this a blip or are we headed for a weakening recovery? Markets are signaling that it could be a slower tightening than they initially might have expected but upcoming data will help investors solidify their response. Job’s Openings and Labor turnover survey (jolts) will tell investors if there is a labor market slump. CPI inflation numbers on food and energy will tell investors how big the labor market spillover troubles are. Additionally, real average hourly earnings are included in this report to be released Wednesday. Finally, retail sales data is released for April on Friday. Growth is expected to slow already but the additional slowdown could be a warning.

FINSUM: These data releases are critical for not only what the bond market sees but what the Fed sees as well. If economic data slows this could change the cadence of the recovery and QE.

(New York)

It was an awful day for markets, with all three big indexes getting hammered, including a Nasdaq loss of 2.7% (the Russell 2000 lost over 3%). The reality is that things are likely to get worse. The inflation reading which spooked the market confirmed the worst fears of investors: that the economy may be heating up so much that the Fed will be forced to taper its support early. Every piece of data is now likely to be understood from this fearful perspective in coming weeks, which means volatility is probably going to stay quite high.

FINSUM: The market is irrationally afraid of inflation right now and has become very disconnected from fundamentals. Earnings are doing quite well and the fundamental direction of most companies is strong, including tech stocks, which are getting battered.