Market Strategy 11/15/2021
Is That All There Is?
With inflation shown to be at a 30-year high last week, investors are pondering the stock market’s climb up the “wall of worry.”
Key Takeaways
- With 460 or 92% of the companies in the S&P 500 index having reported, earnings are up 42.3% from a year earlier on revenue growth of 18.7%. At this late point in the season, 81% of firms have beaten analyst estimates.
- M&A activity has been in the headlines as bellwether conglomerates in the US, Europe and Japan announce plans to break up their businesses into separate companies.
- Higher yields in the US Treasury market caused a pause in US stocks last week as investors consider the trajectory of inflation.
- Data released last week showed inflation in the US at a 30-year high. One consumer sentiment index slipped to a 10-year low.
A 30-year high for inflation, a dip in consumer sentiment and a move higher in key US Treasury yields saw stocks slip from their latest round of record highs by the end of last week.
The latest consumer price index report added to concerns that inflation at a 30- year high could indeed remain a stickier problem and challenge for businesses, consumers and monetary policy makers to contend with over the next four to six months or even longer. Supply chain disruptions, higher wages, labor shortages and increased demand for goods and services by consumers and business as well as stubbornly high commodity prices continue to present a challenge on the economic landscape.
That said, the Fed’s recently announced tapering of its monthly bond buying program should help dampen inflation once the unwinding gathers momentum. Prospects that the Fed will wait six months into next year before it considers tweaking its benchmark rate higher along with the possibility that negotiations ongoing on Capitol Hill may serve to right-size plans some politicians have for a super-sized spending program could help as well.
Activity in the US Treasury market has exhibited volatility of late that in part reflects the uncertainty that surrounds the negotiations in Washington as well as the risks suggested in the latest tranche of inflation data.
Supply Issues Likely to Persist into 2022
In our view positive offsets to the current waves of inflation hitting the US economy at this time are likely to emerge as the effects of what may have been overstimulation of the economy at the height of the pandemic fade. With the economy on the mend, corporations exhibiting substantial resilience in Q2 and Q3 earnings season results and the administration in Washington seeming of late to pivot or at least soften its opposition toward traditional energy while the economy transitions to alternative (cleaner) energy— inflationary pressures could likely prove to be transitory if protracted rather than fleeting.
Looking ahead into the first quarter of next year we foresee the potential for a re-emergence of competition to surface among businesses as supply chain disruptions begin to soften once the holiday logistic panic passes and the annual lunar holiday takes place in China. Until then a veritable “free-for-all” buying panic and logistic log jam is likely to remain the worry du jour.
Much of the broad level of inflation that boosts prices of chicken, pork, beef, fruit and vegetables at the supermarket can be attributed to supply chain disruptions caused by the pandemic’s spread among agricultural workers and employees of food processors that curtailed and shuttered seasonal harvesting and processing operations at plants and farms across the country. Vaccinations of efficacy are likely to help counter this problem so long as vaccines are well distributed and administered.
Some Get Together, Others Break Apart
M&A activity has been making headlines of late as bellwether household name conglomerates from the US, Europe and Japan announce plans to break up their businesses into separate companies to realize value not reflected in the sum of their parts. Meanwhile other firms are shopping to acquire companies that offer potential synergies to strengthen their competitive stance. Acquisitions, breakups and consolidations are a thematic investment concept providing investors with opportunities to consider also adding liquidity to the markets and potential for further equity upside.
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