Sightline Weekly Market Update: Investors Focus on Inflation
Most markets ended the week lower in the holiday-shortened trading week. The Nasdaq (-1.62) bore the brunt of the weakness as large-cap technology stocks slid with a rotation into stocks prone to benefit from higher interest rates, like bank stocks. The S&P, S&P 400 and Russell indices all fell during the week but less than 1%. European indices were mixed with STOXX Europe index advancing .21%, while Germany and Italy lost ground during the week, and France and the UK gained. In Asia, the Japanese Nikkei 225 crossed the 30,000 mark for the first time in more than 30 years but still below the all-time high set in 1989 (38,597). In China, the Shanghai Composite index rose 1.1% on two trading days following the Lunar New Year holiday.
Economic news and increasing interest rates gathered some attention this week as the US 10-year Treasury advanced to 1.34%, sparking fears of inflation. Retail sales jumped 5.3% month-over-month in January versus consensus expectations of 1.1%. This increase in retail sales, the largest increase since last June, is attributed to the latest round of stimulus cheques. Core retail sales, which corresponds closely to consumer spending in GDP calculation, increased by 6% after December’s decline of 2.4%.1 Last Wednesday, the Department of Labor reported the Producer Price Index increased by 1.3% in January. The PPI is the largest monthly increase since the index began in 2009.2 The combination of retail sales, PPI data and the increasing 10-year Treasury rate are increasing inflation concerns.
Additionally, the current $1.9 trillion stimulus package being debated in the US Congress has critics worried about further inflationary pressures. Off-setting the inflation concerns and supporting the argument for additional stimulus was the Department of Labor weekly initial jobless claims report. On Thursday, the report for the week ending February 13, jumped to 861,000 vs the previous week adjusted to 848,000. Estimates for initial jobless claims were at 773,000, still a staggering number. Continuing claims were 4.494 million versus the estimate of 4.425 million and the previous week’s revised higher number 4.558 million.3 Prior to the pandemic, initial jobless claims were averaging about 200,000 per week. Unfortunately, to date, the job creation is still quite muted as lockdowns and COVID fear still grips the nation preventing any return to a new normal.
While the inflationary pressure is a concern, the Fed, along with many analysts, think inflationary pressure caused by supply chain disruptions and labor shortages will be transitory. If this holds to be true, rate increases are likely to produce short-term volatility. As mentioned previously, we are in a period of transition to a digital economy and disruptive technologies will provide opportunities for equities to continue to outperform for some period into the future. While higher rates challenge the trajectory, the trend is unstoppable.
Despite all the bad news and fear, there is optimism for an acceleration of job creation and spending from pent-up demand once we cross a threshold of vaccinations. No one is sure where this imaginary threshold resides, but most are considering at the current rate of distribution, we could see a return to more normal conditions by year-end. Given the resistance of many to the vaccine’s efficacy, it remains to be seen how to balance both sides necessary for a fully functional economy.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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