Inflation, Inflation, Inflation...
What the Market? - JUL 19, 2021
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What the Market?
Mr. Market’s earnings season party was ruined by inflation concerns last week. The higher-than-expected CPI reading stole the thunder from a promising start to Q2 earnings reveals that we hope it will normalize as more corporate data is released in the coming weeks.
What’s driving the market?
Inflation is (unfortunately) still the belle of the ball: The past week has brought an overbearing amount of headlines talking about the biggest surge in inflation since the 2008 crisis and whether the Federal Reserve is taking the right approach. The CPI jumped to 5.4% in June on a yearly basis from the 5.0% May reading which is well above the market expectation of 4.9%. Markets were dragged down by the noise of the inflation figure to the point that economists dubbed it an exaggerated correction. The Chairman of the Fed testified twice last week about the transitory nature of inflation and the Central Bank’s plans going forward, including the multiple tools at its disposal to adjust longer-term inflationary issues. Unfortunately, that was not enough and equity markets receded by the end of the week.
Earnings Season is back: Second quarter earnings kicked off last week with major banks crushing the already elevated Q2 expectations. So far 85% of companies that have reported earnings have beaten market analysts’ estimates. Big banks led the way with stronger than expected profitability driven primarily by trading and investment banking services. Meanwhile, many traditional banks expect the incoming interest rate adjustment by the Fed in the near future to also boost bottom-lines in the coming years. Q2 figures are expected to show the first steps towards economic “normalization” and the extent of the economic rebound caused by the vaccination effort and subsequent reopening.
What’s an investor to do?
Inflation data keeps making headlines and is surely a cause for concern if kept unchecked. Continue monitoring the incoming data but remember that inflation in this context can be mostly associated with the accommodative Federal Reserve policy and comparatively low CPI baseline from last year. Although the media may associate inflation with a negative sentiment, some inflation is healthy for growth, and particularly, for an economic recovery. As we kick off Q2 earnings season, we will get a closer look at how corporate America is doing. Be attentive to consumer and defensive cyclical stocks in reopening sectors which will provide valuable insight into what the rest of the year will look like.
Remember all the talk about reopening stocks and consumer cyclical picks? Well, in the coming weeks it may start paying off (if it hasn’t already). With the economy starting to show significant signs of recovery in retail and services that lagged the push, it may be wise to start consolidating your strategy to the new, new normal. Value is back in fashion and consumer cyclicals have recovered most of the lost ground from 2020. On the other hand, pandemic winners have lost a lot of ground compared to their pandemic highs (check out how ZM and PTON have fared- hint: it’s not great).
Keep an eye on the economy
This week, all eyes will be on the European Central Bank (ECB) as they make a decision on interest rates and share a statement regarding monetary policy. Many analysts expect a cautious statement reinforcing a dovish monetary policy. Recently, the ECB shifted its inflation target from “below 2% to 2% with a commitment to symmetry”, meaning that inflation will be allowed to go a bit higher, so as to help propel the economic reboot of the Eurozone. Sounds familiar, right?
Consumer Defensive: Coca-Cola, Philip Morris, Kimberly-Clark
Consumer Cyclical: United Airlines, Southwest, American Airlines, Domino’s Pizza, Chipotle, Autonation, D.R. Horton, Whirlpool
Pharma and Healthcare: Johnson & Johnson, Anthem, Danaher, Abbott
Tech: Netflix, Twitter, Intel, Snap
Others: Blackstone, Newmont, Dow, American Express, IBM, Honeywell, Haliburton
Monday: Eurozone construction output, Bank of England speech, Japanese CPI
Tuesday: Bank of China interest rate decision, ECB bank lending survey, US Housing data, Bank of Japan monetary policy meeting minutes
Wednesday: US Mortgage applications, Australian retail sales
Thursday: US Jobless Claims, ECB interest rate decision and monetary policy statement
Friday: UK retail sales, Eurozone, US and UK PMI, Eurozone finance ministers meeting
If you didn’t know, now you know
For the first time in over six decades, Cuban citizens took to the streets to protest communist regime. Cuba’s economy contracted over 11% amid the pandemic and living conditions have deteriorated, many Cubans lack basic goods and services including medical attention amid increasing numbers of COVID infections.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
Money Heist on Netflix, a fascinating story of a criminal mastermind who found a way to rob the Spanish Mint without stealing anyone’s money!
Promesses by Dimmi, is an upbeat sax-house album that will have you vibing and tapping through your day
After 24 years searching, parents reunited with long-lost son
A content guide to investing (books, books, books!)
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