Market Strategy 6/07/2021
The Beat Goes On
US investors are anticipating the post-Covid world that could be just months away.
Key Takeaways
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With stocks at near record highs and the 10-Year US Treasury yield modestly lower from its peak in late March investors will likely consider what will be the next catalyst to move stocks higher.
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This week investors stateside will have much to consider including the JOLTS job openings number. In April the JOLTS data showed more than 8 million jobs open at US companies. The May data will provide an indication of the strength of the US economy.
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Last week’s non farm payroll gain fell short of expectations but was well received by the markets as it suggested that the Fed’s accommodative monetary policy continues to be justified.
The week ahead will likely reverberate with the topics of the day tied to the goings on in Washington related to the infrastructure proposals, increased government spending, higher taxes for higher wage earners, the G7 plans for a minimum tax on corporations and the worries about inflation and its implications for the national debt, equities and other asset classes.
Not a light list to ponder, but one that the equity and bond markets have been managing and dealing with remarkably well thus far this year. Consider that stateside equity markets as of last Friday’s market close stood close to their alltime highs while the yield on the ten-year US Treasury was at 1.55% (almost 11% lower than its Q1 2021 high of 1.74% reached on March 31st).
Yesterday (Sunday) Treasury Secretary (and former Federal Reserve Chair) Janet Yellen in an interview with Bloomberg News said that President Biden should push ahead with his $4 trillion spending plan even if it triggers inflation that persists into next year and higher interest rates. The Treasury Secretary was quoted as saying “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” She went on to say, “I will not give up on the next packages,” adding, “They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy.” Yellen added that monetary policy makers can handle any potential rise in inflation if it sticks.
While the Treasury Secretary’s comments were not any new revelation of her views on stimulus and inflation risks her comments will likely add fuel to the fire for discussion this week from Main Street to Wall Street and to debate on Capitol Hill.
It’s important to note that as strategists we are politically agnostic and comment solely from our perch on the market radar screen as to how we see ongoing discussions and events stateside that are likely to have an impact on the economy and the markets.
In our view the current price increases being experienced by business and consumers are largely driven by transitory disruptions in a large number of supply chains that include food (beef, pork, poultry, vegetables and fruits), microchips, oil, lumber, copper, shipping containers and trucking that are mainly reflective of disruptive factors tied to pandemic response, shutdowns and forward planning midst the pandemic crisis that was tied to expectations as to how long the pandemic would last and how long its impact would be felt by the economy, business and the consumer. As a result of the vaccination process having been deployed in significant scale stateside (latest reports estimate some 300 million jabs in the US alone) it now appears that the process of ramping up production lags demand for many things but just in the near term.
In our view many of the shortages disrupting a variety of supply chains could be remedied quicker than many expect as the infrastructure to deliver many services and products efficiently was in place pre-pandemic. The challenge is “how long does it take to reboot the different supply chains”? Each “chain” has its own particular set of idiosyncratic quirks and kinks.
Once production and services are reinstated at prepandemic levels we expect that near-term inflation will be challenged by the reinstatement of the competitive landscape that existed pre-crisis and is empowered by technology (logistics, robotics, algorithms, Internet of Things, Big data) along with secular trends that include technology, globalization and regionalization. When it comes to fiscal stimulus our concern is “when is more stimulus simply too much stimulus?”
Many clients we speak with (institutional and private clients) worry that a risk for longer-term inflation could come from overstimulation via government spending programs. We think their concern is justified considering the amount which has thus far been spent and the resilience and strength the economy is exhibiting through the reopening process—whether it’s the positive sentiment and activity driven by business, labor or the consumer. Perhaps “enough is enough” at least for now.
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