This week’s charts
Source: Bank of America
Correlation of yields and styles
*5Yr rolling correlation; monthly change in US 10-yr yields vs outperformance to S&P 500 (TR) ANALYST TEAMSource: Scotiabank GBM Portfolio Strategy, Bloomberg.
Producer Price Data (PPI) as a measure of inflation
Unlike the CPI report, producer price data surprised to the upside. The Producer Price Index (PPI) is a measure of inflation based on input costs to producers.
The August 1979 BusinessWeek issued a magazine with cover line “The Death of Equities — How Inflation is Destroying the Stock Market” in which it outlined how inflation would depress equity returns for a generation of investors.
In retrospect, this was probably the worse market call ever made.
The funny aspects of business magazine cover stories is that in the short term they are perceived to be correct. It was not until August 1982, three years after the publication of the BusinessWeek article that investors suddenly recognized the financial landscape had dramatically changed. The stock market exploded off the bottom on August 17th and never looked back.
Two years have passed since BusinessWeek/Bloomberg’s 2019 “Is Inflation Dead?” piece and we believe we are rapidly approaching inflation’s inflection point.
Multiple fundamental trends now confirm this view:
o In 2019, money supply was only growing at 4% per year; today it is growing at 27% per year — the fastest rate in history. In 2019, the Federal Reserve’s balance sheet stood at $4.3 trillion compared with $7.3 trillion today. In 2019, US government debt totaled $20 trillion. Two short years later, it stands at $28 trillion — up 40%.
o Over the last year, the US government has borrowed and spent $2.4 trillion to replace $800 billion of lost economic activity resulting in a US savings glut of nearly $1.5 trillion. Not content with the massive surge in government spending, the Biden administration is proposing an additional $3 tr in stimulus spending.
o With the economy now starting to recover, the press is filled with stories of shortages that have developed in countless markets from lumber to semiconductors to restaurant workers to ketchup packets.
• From farm to bottler to supermarket cooler, a liter of Coca-Cola creates 346 grams of carbon dioxide emissions, the company’s data show. That’s less than half the tree-to-toilet 771-gram carbon footprint of a mega roll of Charmin Ultra Soft toilet paper, as measured by the Natural Resources Defense Council, an environmental group.
• Math like this is fast becoming obligatory. Investors are increasing pressure on businesses to disclose the emissions of greenhouse gases related to their products and services. Regulators are starting to ask about that, too. Within the next couple of years, every public company in the U.S. might well be required to report climate information.
• Investors are eager to buys stocks that rank high on ESG factors. A Wall Street Journal analysis of ESG grades issued for nearly 1,500 companies by three rating firms found that nearly two-thirds—942 companies—got different grades from different raters.
• Nearly a third of the companies were deemed ESG leaders by one or more rating firms, but labeled ESG laggards by one or another rater. Credit ratings, by contrast, are broadly consistent.
• Americans may be richer than they think and less unequal than they’ve been led to believe.
• There are strong reasons to include pension and Social Security guarantees in wealth calculations. Most workers forfeit 12.4% of their income annually in payroll taxes in return for Social Security payouts starting in their 60s, but that wealth is ignored in standard inequality measures.
• In the 40 to 59 age group that is the paper’s focus, the top 5% of households control 63.5% of “market wealth”—liquid assets, housing, and accounts like 401(k)s. But include future pension and Social Security income, and the top 5% share is a more modest 45.4%, the authors find.
One of the biggest residential real estate brands in the world, Zillow, is getting hammered in the midst of one of the biggest housing booms we’ve ever seen? What gives?
• Some claim this was the market’s acting as a forward-looking indicator showing the housing market is going to crash. This one doesn’t pass the smell test. Other housing-related stocks are crushing it this year.
• Another theory was that this is a housing boom in price only. This makes sense considering how low inventory levels are. On the other hand, part of the reason for this is houses are flying off the shelves. Existing home sales are higher than they’ve been in a long time.
• If it’s not the industry and it’s not a company that’s falling out of favor the next logical guess would be valuation. This is an argument that seems to hold water. The price to sales ratio was well over 13x in the February blow-off top, twice the average over the past 5 years.
There are a number of stocks with similar return profiles. Stocks that are still up a lot from the lows of the Corona crash, despite being down a lot from their highs.
Sometimes there is a good reason stocks get cut in half. Sometimes there is a good reason stocks rise 500% in a matter of months.
We would all like for there to be a simple explanation for complex topics like the movements of stocks in the short run. But most of the time these price moves are random, an amalgamation of emotions, differing opinions, expectations and momentum.