Market Strategy 6/14/2021

Key Takeaways

• With stocks at or near record highs economic data and the outcome of the Fed’s FOMC meeting on Wednesday will be a primary focus this week.
• The yield on the 10-year Treasury counterintuitively fell further last week while stocks rallied. Increased demand for US Treasuries has been in part attributed to pension plan rebalancing as well as strong foreign demand for US Treasuries.
• Economic data released last week showed a sharp upturn in inflation in the CPI report that exceeded expectations. 

A treasure trove of economic data as well as the outcome of the Federal Reserve’s FOMC meeting on Wednesday of this week should keep traders busy and investors tuned in respectively for intra-day opportunities and signs of where the economy is heading and what effect it will have on stock and bond prices.

Last week saw inflation as tracked by the consumer price index jump to 5% year over year in the month of May. (An earlier survey of economists by Bloomberg had called for a 4.7% inflation rate for May). The eye catching number followed the prior month’s 4.6% year over year reading.

Counterintuitively, stocks closed higher on Thursday (the day the inflation figures were released) and broadly advanced for the week. The major indices moved mostly higher on the week with the S&P 500, the S&P 400 (mid-caps), The S&P 600 (small caps), the Russell 2000 (small-caps) and the NASDAQ Composite (some 40% weighted in tech and tech related companies) respectively gaining on the week: 0.41%, 0.86%, 0.90%, 2.16% and 1.85%. Of the major US indices only the Dow Jones Industrials moved lower on the week slipping 0.80% in a market that reflected positively on two sectors which have lagged so far this year--information technology and consumer discretionary.

The yield on the 10-year Treasury, which one might have expected to move higher on the hotter than expected inflation rate, moved lower to end the week at 1.452% some 16.6% lower than where it had peaked at 1.74% in the first quarter of this year. It’s worth noting that last week’s rally in the 10-year Treasury may be more of a statement that the Treasury yield surge from January to the end of March may have been somewhat overdone. At Friday’s yield of 1.452% the 10-year Treasury yield was nearly 60% higher than where it stood on January 4th of this year at 0.914%.

In commentaries over the weekend a number of observers read the actions of the stock and bond market as suggesting that investors where “shrugging off” the inflation uptick and keeping focused on what continues to be the Federal Reserve’s commitment to a high level of accommodation in monetary policy that gives the US economy time in which to more fully recover from the negative impact of the pandemic.

We agree with that view but would add that many of the professional investors as well as most of the private investors we speak with far from shrugging off any report of a higher than expected increase in the CPI are keeping their eyes focused on inflation, looking for signs that would suggest that inflation could be less transitory and stickier than the economists at the Fed are expecting.

In our view the risk of inflation that would prove to be stickier than most folks expect lies less with Fed policy than it does with fiscal policy and stimulus programs that are being considered and could come from Capitol Hill and the Administration’s efforts.

Over the course of the past 11-plus years the Federal Reserve’s efforts have been remarkably on target and sensitive to both inflationary and disinflationary trends in navigating the recovery process from the Great Financial Crisis and currently steering the economy through a vicious pandemic which disrupted and even shuttered many segments of the US economy.

For many of us who have toiled in the financial markets for nearly four decades the Fed’s current efforts and its successes in dealing with two successive crises so far has been remarkably effective in comparison to earlier Federal Reserve efforts in providing liquidity without high levels of inflation in periods from crisis to recovery. Of course we’re not out of the woods from the pandemic yet but compared to where we were last year things have improved substantially (ask your Oppenheimer advisor or institutional representative for a pdf copy of the Market Strategy Radar Screen June Chart book released just last week).

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), semiconductors, oil, lumber, copper, shipping containers and trucking that are mainly reflective of disruptive factors tied to pandemic response, shutdowns and forward planning midst the crisis that may have projected too negatively as to how long it would take to find vaccines of efficacy to deal with the virus and the actual resilience of American business and the consumer aided by advancements in technology. Now the demand side of the economy is growing at a pace that is rivaling the pace of the supply side of the economy to ramp up production and “deliver the goods” so to speak.

While it may require some patience near term while producers reboot many various production lines, our expectations based on the levels of technology embedded in the US and global economies are for an economic recovery that leads to a sustainable expansion sooner than some might project.