Oh let me guess, another inflation story?
What the Market? - Jun 21, 2021
We’re splitting up the two sections of our newsletter (What the Market? and The Curious Investor). We will continue to publish our weekly update, What the Market?, with updates on Mr. Market, the economy, and key financial events to watch out for on a weekly basis.
The Curious Investor is moving to a monthly cadence to provide higher quality and in-depth analysis on positions and trends that have made it past our initial screens. We believe this will help filter out some of the noise and allow us to deliver content of higher value to you.
You don’t need to do anything, we’ll continue to send out What the Market? every Monday morning, and once a month we will include an edition with the Curious Investor!
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What the Market?
Mr. Market hasn’t quite figured out what to make of the Fed’s comments. He seems a bit disoriented, perhaps even a bit unhinged. He’s looking for a bit of direction in his life, ideally with some fundamental support (story of my life, am I right?).
What’s driving the market?
Don’t you know any other jokes? It feels like we’ve been talking about inflation for 9 months now….and here we are again. Annual inflation hit 4.2% in the US. The reading represents the highest headline inflation since 2009 as CPI, PPI, and import prices continue to rise. Keep in mind that inflation is not inherently bad on its own, particularly, in the current context inflation is still at a “healthy” level. Inflation levels started from a low base given the pandemic, meaning it is only natural that it would make significant moves. Considering that commodity prices continue to rise, demand across industries is surging and creating supply chain bottlenecks, it is likely that inflation will remain the topic of conversation through 2021. Let’s not forget that the Fed’s accommodative policies which have pumped billions in stimulus funding into the economic machine to keep its wheels turning. Inflation is a tradeoff we make in return for a strong economic recovery.
Let’s circle back, connect offline, or [insert your favorite jargon phrase about not doing anything]: Given the current context, the Fed has come under pressure regarding its inaction to adjust monetary policy to slow down inflationary pressures. As expected, the Fed restated its unchanged monetary policy but did suggest that they are closer to discussing action. Read that, we’re getting close to talking about Specifically, about tapering its asset purchasing program. Moreover, the Fed shared its economic projections, which included a 1% hike in inflation expectations (3.4% vs previous 2.4%) and an increase from 6.5% to 7% in GDP growth for the year, with unemployment finishing at 4.5% by year end. This week analysts will be paying close attention to the Fed’s language in a few speeches lined up this week and Powell’s testimony to Congress on Tuesday. Keep an eye out for any clues regarding tapering and a more hawkish approach to policy that may trigger an infamous “taper tantrum”.
What’s an investor to do?
You know when every little thing seems stressful and you can’t process anything? So you call your therapist and she tells you to ignore the voices and trust yourself? Okay, well call your therapist. Equity markets are going through an adjustment period and lacking direction at the moment. Volatility is generally low however, markets continue to experience numerous irrational daily swings. Do your best to ignore the noise, and trust your positions. If you’re stressing out about the daily or weekly swings, you probably aren’t as convinced about the long-term prospects that base your decision-making.
Inflation is here and it doesn’t look like it’s going anywhere. It’s time to start thinking about designing a portfolio that can hedge against inflation. Consider exposure to commodities and defensive products where the costs are passed onto the consumer (e.g., produce, home staples, healthcare).
Furthermore, it would be wise to adjust for a more hawkish Fed. As the Fed’s policies change, there is a risk of another taper tantrum and soaring bond yields. Such an event would likely cause an outflow of capital from emerging and frontier markets as interest rates rise to tame inflationary pressures in the long term. For those overexposed to higher risk / growth stocks, consider rebalancing towards strong value plays that may help reduce risk exposure.
Keep an eye on the economy
Personal consumption expenditures (PCE): The Fed’s preferred measure of inflation will be released by the end of this week, with additional significance driven by the Fed’s recent adjustment to its inflation forecasts. Economists expect annual PCE to hit 3.9%, the highest reading since 2008.
Industrials / Logistics: FedEx
Meme but also Cybersecurity: Blackberry
Healthcare: Rite Aid
Monday: China Interest Rate decision, ECB President Speech
Tuesday: Eurozone consumer confidence, ECB speech, Fed Chairman speech
Wednesday: ECB speeches, Eurozone, US and UK PMI, US housing data
Thursday: European council meeting, Eurozone, economic bulletin, UK monetary policy summit and interest rate decision, revised US Q1 GDP data, Jobless Claims, bank stress test info and durable goods orders
Friday: US Core Personal Consumer Expenditure Price Index, personal income data and consumer sentiment.
If you didn’t know, now you know
Mass protests are underway in Belarus where the people fear their country is turning towards an authoritarian leader. Alexander Lukashenko claimed victory in August’s presidential election and exiled his main challenger. In response to the protests, Lukashenko has detained over 35,000 people since claiming victory and is reportedly holding nearly 500 political prisoners.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
The Inner Game of Tennis by Timothy Gallwey. The “inner games” book series are practical and applicable books that transcend the sport they aim to help you improve at. This one, a must-read for avid tennis aficionados, works around self-doubt, nervousness and concentration lapses, which amateurs typically struggle with. A different, more “pragmatic-zen” approach to the sport.
Ain’t Nodody by Bakermat. A new single from WTM’s favorite DJ, Bakermat. Bringing a summer energy we’ve all needed with some awesome beats, sax, and trumpets.
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.