Knock Knock? Who's There? Inflation of course!
What the Market? - Nov 15, 2021
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What the Market?
Mr. Market picked up the paper, opened up the front page and took a deep breath. He turned around, poured himself a tall glass of 18 year Hibiki and sat down in his armchair as he though to himself, what in the flying kangaroo is going on? The only thing that could make matters more confusing for the markets would be if the economy was run by a meglomaniac via Twitter (thank goodness that’s just a joke now huh?). The data is pointing in different directions, which means analysts need to get it together as they’re second guessing themselves amid short-term volatility and historically high valuations. Meanwhile, US equity markets are running with the bulls, let’s just hope this market is the Joe Distler of bull runs.
What’s driving the market?
Don’t say the “I” word, don’t do it, just don’t, I can’t anymore...Alas, because the media exists for clicks like a gnat looking for a 3 week old banana in a trash chute, we’re going to talk about inflation again. Last week’s Consumer Price Index (CPI, a.k.a consumer inflation) hit a 30 year high (albeit from a debunked, low base). Yes, it is not ideal, yes it hasn’t slowed down yet, and yes it could keep going a while longer. Several media outlets opted for the apocalyptic story as expected. What happened? Equities dive bombed on retail panic and recovered the following day. *Takes deep breath,* repeat after me, fish are friends, not food, and inflation is not necessarily a bad thing during an economic recovery.” If we could ever move behind the catchy headlines, corporations have been quite open and transparent about transferring most rising cost pressures onto consumers. But fellas, that’s exactly what inflation is...but where are those rising cost pressures coming from? Corporations have indicated that most cost pressures are stemming from supply chain shortages due to pent up demand from a restarting economy. Inflation will likely persist through at least Q1 of next year however, this should slow as the Fed begins using its monetary policy levers and supply chains are able to adequately address their bottlenecks.
Notably, and probably a reason to consider we are closer to the crest of the inflationary wave, the Producer Price Index (PPI), which measures inflation for producers and manufacturers actually stayed flat and came in BELOW expectations for October. We’ll pause here for a moment for you to Google any media coverage on this. Here’s our hot tip on how to lose all your money in 10 days: make all your decisions based on the media. Keep an eye on inflation figures, particularly Core Inflation (excluding food and energy) and the Personal Consumption Expenditure (PCE) readings to get a better feel of how this is evolving. Brownie points for those who listen to big box retailers this week (Walmart, Target, Macy’s) to hear what they have to say about supply chain and inflationary pressures.
What’s an investor to do?
Time to turn off the news. If you must listen, try this exercise out, switch outlets every now and then and take note of how the news is relative to the bias of the speaker on a given topic and consider what their interest or expertise actually is. It’s the end of the year, take the time over the last two months of the year to start planning ahead and developing your 2022 strategy.
SPOILER ALERT: We’re going to tell you the news coverage for the next month. Here it comes, you’ve been warned:
Inflation keeps rising
Christmas isn’t cancelled
Retail sales accelerate
Federal Budget chaos will ensue and all will be resolved
How do we know? This story plays out every year like groundhog day. It is unrealistic to even consider the US government defaulting on its debt, and more so after a pandemic. Can you imagine the degree of insanity that it would entail? The global “risk-free rate” defaulting. Nonetheless, the media won’t be able to resist themselves from that 3-week old banana. All these things are just for you to consume rather than think, and who doesn’t love a dystopian alternative? Lately news outlets resemble Hollywood productions more than actual information.
Plan and stay informed. Q4 is typically a good time to build on positions with the incoming Santa Claus Rally right around the corner. Make sure you know why you invested in your positions and start evaluating your portfolio. Are your positions still attractive for the reasons you bought them? While the new year doesn’t mean anything to money and the markets, it is a time that retail investors reevaluate life and their goals. Take advantage of the retail rotation to make a plan for 2022. Consider consolidating into your stronger positions and leaving room to jump on 2022 trends.
Keep an eye on the economy
Retail Sales: With the holiday season approaching, retail sales are a decent gauge for economic performance across cyclical and hospitality sectors; key drivers of the US economy. Estimates suggest an acceleration in sales (1.1% vs 0.7% in September), and third consecutive month of growth, driven by the stronger economic outlook, and despite the low economic sentiment
Consumer Defensive: Walmart, Target
Consumer Cyclical: Home Depot, Lowe’s, TJX, Kohl’s, Macy’s, Williams-Sonoma
Monday: Chinese retail sales, industrial production, Bank of England speech
Tuesday: US retail sales, Fed speech, UK unemployment rate, Eurozone GDP data
Wednesday: UK CPI, PPI, Eurozone financial stability report, US housing data, Fed speeches
Thursday: Eurozone CPI, US jobless claims
Friday: UK consumer confidence, retail sales, ECB speech and Fed speeches
A question from our readers:
No question this week - drop us a note in our Slack group feedback channel or email us at email@example.com with a question you’d like to see answered here!
What we’re vibing:
Hot Ones by First We Feast. Albeit not the deepest or funniest show on earth, Hot Ones is in its 16th season combining two of the 21st century’s hottest commodities: spicy food and celebrity interviews. The questions are actually insightful, and watching famous people struggle with spice is quite humanizing (and hilarious). A guilty pleasure of ours we wanted to share with y’all.
The Predators’ Ball by Connie Bruck. An insightful financial literature/history book named after the infamous Drexel Burnham Lambert annual conventions in the late 70s. This book covers the emergence of junk bonds, raiders and the story behind some of the most savage hostile takeovers through the use of junk bonds and the private setup of leveraged buyouts. Quite telling of the time, and an incredible read for those into geeking out on finlit.
A content guide to investing (books, books, books!)
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.