Inflation data is heating up and we are beginning to see some volatility spill into the capital markets. The U.S. Bureau of Labor Statistics released its monthly report on inflation this week revealing that the headline Consumer Price Index (CPI) rose 0.8% month over month and 4.2% year over year. The core CPI, which strips out food and energy, rose 0.9% month over month, its highest reading since the early 1980s, and 3.0% year over year. On top of that data, we have wrapped up a blowout earnings season, 78% of companies beat revenue estimates and 87% beat earnings estimates. This creates more concern about the potential interest rate hikes and inflationary pressures.
Given the base effects from a year ago, we view the month over month changes as more informative for the inflation outlook. Used car and truck prices surged 10% in April, their largest gain ever and representing the largest contributor to the overall rise, while other sectors seeing large jumps month over month included lodging away from home and airfare. Major CPI components, though, such as rents (0.2%), showed much more moderate rises.
Most of the volatility is ironically attributed to economic recovery. Our research partners are calling for upwards of a 6% global economic expansion in 2021 and a 4.5% GDP growth in 2022. The debate will be if this inflationary pressure is simply a sign of temporary growth and will subside or become more of an established trend.
There are several stories over the last month that are helping fuel downside pressure-inflation, taxes, valuations, sentiment- but macro fundamentals are providing solid long-term support for stocks. We believe the overall market has been priced for perfection, and that this is a natural reset of valuations. This ‘steam release’ is a healthy one for setting the stage for the next move higher. We currently favor companies that have been committed to consistent dividend payments over pure growth stocks.
Hope you are enjoying the spring weather and spending time doing the things you love!
Jay
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