INFLATION WATCH! August 2021
INFLATION WATCH! August 2021
Where are we now?
July is in the books!
Markets continue to grind higher, supported by mostly encouraging economic data. However, that pesky inflation is still around and treasury spreads have slowed their upward climb. That suggests the outlook may not be as rosy as the stock market suggests it is.
To the Charts!
Chart #1: Growth Stocks Beat Value
What’s this chart telling us? Growth stocks have finally overtaken value stocks, year-to-date. Both are having strong 2021 campaigns. A strong earnings season across the board could explain performance for both.
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: Bond Market Calling BS?
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? The optimistic view is that it’s just a head-fake. Yield spreads fluctuate all the time and it’s not unheard of that a narrowing spread reflects some short-term jitters. The less-rosy view is that the bond market is calling ‘bullshit’ on the current trajectory of the economy.
Chart #3: Inventories Respond to Demand
What’s this chart telling us? Demand softened in May 2021. The supply-chain issues we noted in Inflation Nation seem to be resolving themselves as businesses catch-up. Alternatively, demand could be softening, though that seems unlikely as personal consumption expenditures were also up.
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.