The Inflation Puzzle

U.S. Stocks Fall, Posting a Weekly Loss… U.S. stocks fell, snapping a three-week streak, as data showed consumer sentiment regressed in early July, driven in part by concerns of high inflation. The week was ‘marked’ by several choppy sessions of trading, as investors digested a higher-than-expected inflation reading on Thursday, including comments by Fed Chairman Jerome Powell and the economic data released on Friday. Shares of cyclical groups such as financials and energy companies lagged behind the broader market, dragging down all indices. Most notable, the Russell 2000 index of smaller companies dropped 5.1%, its worst week since October. Meanwhile, Treasuries have continued to rally. Even lingering concerns about the Covid-19 Delta variant that have ‘flared up’ lately, exacting pressure on shares of airlines and cruise operators on Friday, and making them among the S&P 500’s worst performers. “I think it’s going to be a very volatile second half of the year,” said Shana Sissel, chief investment officer at Spotlight Investment Group. New data also showed that retail sales gained 0.6% in June, as the economy reopened, even as supply disruptions seriously continue. “I kind of think of it as short-term quiet and long-term uncertainty,” said Joanne Hill, chief advisor for research and strategy at Cboe Vest. The yield on the ‘benchmark’ 10-year Treasury note settled at 1.300% on Friday, falling for the third consecutive week. Most major ‘benchmarks’ in Asia and Europe, and Japan ended the week on a downward note. For the week ending July 13th, The S&P 500 lost 32 points or 0.8% to 4327. The Dow Jones Industrial Average retreated nearly 300 points or 0.9% to 34687 with losses accelerating later in the trading session. The Nasdaq Composite lost 115 points or 0.8% to 14427. As noted, all indices notched weekly losses.

Beware… The Delta Variant… For many Americans, the coronavirus pandemic feels like it’s over. For the U.S. economy, it is not. With the highly contagious Delta coronavirus variant, now the main strain in the U.S., Covid-19 cases are rising in nearly every state after falling in about half of them a week earlier, data from Johns Hopkins University show. The renewed spread may seem ‘stealthy’ to investors focused on reopening the U.S. economy, where businesses across the service sector are finally back in full swing– or at least to the extent they can rehire enough workers to booming customer demand. “While talking about overheating and inflation is all the rage, we are mostly ignoring a crisis that is probably weeks and not months away,” says Arindrajit Dube, the economics professor at the University of Massachusetts Amherst. “And it could impact job growth, business openings, schools, not to mention public health. But pandemic economics is not all done,” he says, warning that continuing spread may spur consumer caution. Interestingly, the University of Michigan’s sentiment survey for July, released Friday, showed a sharp, surprise drop, and Langer Research’s weekly consumer comfort index has trended lower.

Heat and Drought Boost Natural Gas Prices storage lifting prices to their earlier highest levels in two and a half years–and setting the market up for a potential shortage for the winter. Storage for the next winter is a “key measureā€¦.Natural gas has rallied this year, with summer heat and tight U.S.supplies of the fuel insure,” and the U.S. market is about 20% below where it was a year ago almost 10% under the five- year average,” says Gary cunningham, director of market research at Tradition Energy. Winter storm Uri earlier this year had a “double impact on gas storage, as demand risk-takers have grown…rich. But the strategy of buying ‘blue-chip’ stocks that pay dividends, and holding them in one’s portfolio for years as returns and dividends compound, is a battle-tested approach.

RUMBLINGS ON THE STREET

Stephanie Pomboy, in her latest MacroMavens missive. Barron’s She says, “even without a shift into reverse, the economy is decelerating. “As we enter the second half of the year, the largest gains are receding in the rearview mirror,” writes Ms. Pomboy. Now, the “famously ‘forward looking’ ” stock market will have to confront what she calls the “F” word–fundamentals–of slowing earnings growth in coming quarters. Until now, stocks have followed current year earnings prospects higher. But as the focus shifts to 2022, they’ll have to deal with high equity prices and slowing profit gains. That could be “especially problematic with valuations dangling at nosebleed levels,” Pomboy writes.

Jerome Powell, Chair, Federal Reserve. Barron’s Inflation and the Federal Reserve’s next move, meanwhile, remain a source of uncertainty. “Inflation has increased notably and will likely remain elevated in the coming months before moderating,” Fed Chairman Jerome Powell confidently told Congress this past week. He reiterated the central bank’s sanguine take on inflation being a temporary side effect of the economic reopening underway.

Cathy Wood, ARK Investments, on pulling back from Chinese stocks, Barron’s “From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down.”

Bank of America securities economists wrote this past week, Barron’s “The bad news is that we are still not out of the woods, as (inflation measures) are likely to remain elevated through year-end and into 2022. The good news is that we are likely near the peak, at least for the next few months, as base effects are less favorable and shortage pressures rotate away from goods and towards services.”