Inflation Watch! 2021
Three charts that can tell us where the economy is right now
Where are we now? For all the data in the world, it can be hard to parse into something meaningful.
We’ve chosen three charts that we feel reflect the current narrative in the market. We like charts - particularly line charts - because they show the path traveled and provide historical context in one snapshot.
If you’re used to looking at these kinds of charts, you may find the context redundant. Skip it, oh educated one.
If you’re new to looking at this sort of information, hopefully, the context and analysis is clear. We’re not choosing these charts by accident. If there’s something particularly insightful (or confusing), comment on this piece.
Right. To the Charts.
Chart #1: It’s Been Value's Year, So Far
What’s this chart telling us? Value stocks are beating growth stocks, year-to-date. However, growth has experienced a bit of a resurgence following a tough May.
What’s a value stock? Value stocks are companies trading beneath their ‘intrinsic value,’ meaning at a discount relative to other companies’ stocks. Value stocks are like buying a used Toyota because it holds its value vs. buying a brand-new Tesla cuz it’s cool. Think companies like Campbell’s, Procter & Gamble, and Verizon.
What’s a growth stock? Growth stocks are companies trading on the expectation of above-average performance in the near future. Tesla is a growth stock (conveniently) that people will keep buying even though it hasn’t turned a profit yet.
Why does this matter? Growth stocks tend to reflect growing optimism in the market, whereas value can be viewed as a defensive play. That growth stocks are making up ground relative to value could mean the market is shaking off the effects of the pandemic. You could play one vs. the other, but that requires work. For most people, it’s best to remain invested in a diversified portfolio.
Chart #2: Economic Conditions Are Improving
What’s this chart telling us? When the treasury spread is widening (going up), it means lenders are willing to let more people borrow money, typically a sign of improving economic conditions.
What’s a yield spread? A yield spread is calculated by subtracting a higher-yielding bond from a lower-yielding bond. Yield spreads are a good way to gauge improving or worsening economic conditions. Widening spreads indicate improve conditions, whereas narrowing spreads indicate worsening conditions. Read more at Investopedia.
Why does this matter? It’s a good sign. Despite a softening at the end of this month, widening yield spreads tell us that a resilient American economy is finding its way out of the pandemic.
Chart #3: Supply Chains Under Historic Pressure
What’s this chart telling us? INFLATION WATCH 2021. The inflation level over the last few months has grabbed a lot of headlines because everyone is waiting to see if inflation ends up being like the 1970s. As we noted in Inflation Nation, pressure on the supply chain can lead to higher prices as business owners try to catch up to demand.
What is the retailers inventories to sales ratio? This metric shows the relationship of the end-of-month values of inventory to the monthly sales. These ratios can be looked at as indications of the number of months of inventory that are on hand in relation to the sales for a month. For example, a ratio of 2.5 would indicate that the retail stores have enough merchandise on hand to cover two and a half months of sales.
Why does this matter? The chart above shows the unprecedented level of pressure the reopening has had on inventories. When the pandemic took hold, inventories spiked. As the country re-opened, demand rapidly accelerated and inventories felt the pressure.
We’re watching this ratio closely. If the spike continues to favor demand, expect to see prices increase, aka, inflation continue to rise. If inventories catch up back in response to demand, then prices may start to normalize. This chart is one of the most important indicators out there right now.
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