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Back in the seat this week after a week up in Cape Cod. Took the RV for the first trip in over a year. First time to Cape Cod, and I’ve already made an appointment for a cholesterol check after eating my body weight in lobster. Definitely needed to get in nature for a few days and clear the head, and now glad to be back.
Not much has changed in the past couple of weeks. We did get an infrastructure package and Joe Biden delivering a press conference in secret. (If you haven’t seen the video, check it out, it’s quite funny, till you realize this is the guy we voted in). Biden mocked over bizarre video of him ‘demonically whispering’ as viral vid viewed a whopping 3MILLION times (the-sun.com)
We still have the same forces pushing the markets as we did before.
By far the biggest question I’ve been getting lately is on inflation, so I wanted to spend a bit of time on that this week. In my absence, we sent you out a video from Larry Adam, Raymond James Chief Investment Officer and King on the Analogy, who compared our current 5% inflation to that of the release of a blockbuster movie. First few weeks you see big numbers then it subsides. Ahhh OK.
Although I agree with Larry’s outcome, that we will see inflation subside when we start to measure Q over Q, when the numbers weren’t so dismal, I’ll put it another way.
First, let’s talk about Supply/Demand. There is a historic imbalance between the demand for goods and what has been produced in the past 12 months. Huge stimulus has created more cash in peoples’ pockets to be able to purchase, however manufacturers during the initial shut down, were forced to close down plants, hoard cash to protect the business, and that caused a huge log jam for 3 to 4 months, that will probably take 12-24 months to clear. A good buddy of mine owns an air conditioning wholesaling business. He supplies all the local A/C companies with their units as well as parts, insulation etc. His warehouse of 50,000 sq feet, was mostly empty in 2020, and when he was lucky enough to get product, it flew straight off the shelf. His skill set, and daily duties previously consisted of knowing his customers and ensuring they had everything they needed, has now switched to calling manufacturers all over the country to precure product. The harder it is to get, the higher the price demanded by the manufacturer. This is a temporary problem. The chart below that we made I think highlights this pretty well. The chart below will start to normalize as output catches up to the backlog.
By far, what I believe is the most important driver for long term inflation is wage growth. I’ve stated it before and I’m still of the belief that the next “true” recession will be inflation driven. The hyper inflation we saw in the 80s was a wage price spiral. A smokestack economy, a very unionized work force, that had wage growth directly tied to inflation. If inflation went up 7%, wage growth went up 7%. Today the workforce looks quite different. The ECI index (Employee Compensation Index – see below) put out by the Department of Labor shows wage growth at around 2.7%. I wish they would produce a longer chart to show you, where you would see wage growth above 10% in the 70s and 80s.
In summary on inflation…Yes I believe it will be an issue at some point, but not now or anything the market will start to price in. Remember, I believe the market only looks ahead around 6-24 months. Anything longer than that just doesn’t seem to gather any momentum. So, watch the ECI, watch gold prices, and now Bitcoin for slow grinding moves higher. God knows the 10-year treasury is not giving inflation any respect.
Now onto where we are in the markets. I’ve been waiting with cash in my pocket for a while now to take advantage of a “normal” pullback. Somewhere in the 5-15% range, and it’s just not happening on the major indexes, like the S&P 500. We are seeing rotation between the sectors that provide for some opportunity, such as the technology sector in February and May, and the financials just recently. This rotation is providing the opportunities for now.
So, looking forward through my lens, we will either get an overall pullback in the S&P 500 of between 5-15% sometime this year, or we will see the same as what is happening now, which is rotations through the sectors. Overriding all of that is my premise of a long-sustained bull run. This means, we need to be ready to take advantage of the opportunities when they present themselves.
Thanks for all the feedback and questions while I was travelling. I promise to cover a few of the other subjects in the next few weeks. Taxes are next…fun!!!!
Till then here is the buy/sell.
Mick Graham, CPM®, AIF®
Branch Manager/Financial Advisor at Raymond James in Melbourne, FL
Any opinions are those of Mick Graham and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Keep in mind that individuals cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. There is an inverse relationship between interest rate movements and bond prices.
Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.