Tuesday, May 18, 2021
Inflation, Inflation, Inflation
LPL Research dives into the hotter than expected recent inflation data and explains why massive inflation down the road is unlikely.
U.S. stocks open little changed as markets attempt to rebound from Monday’s pullback
- The Nasdaq Composite is up about .3% in premarket trading after being the worst performer of the major U.S. markets Monday. The Dow Jones Industrial Average and S&P 500 Index are flat.
- European markets are slightly higher during midday trading.
- Asian equities finished their sessions higher, led by both the Nikkei (Japan) as well as the Hang Seng (Hong Kong).
What is “tapering” and why is it important?
- The Federal Reserve (Fed) continues to support financial markets by buying $120 billion of bonds each month.
- The Fed currently owns over $7 trillion in mortgage and Treasury securities, which has helped support the Treasury and mortgage markets and has kept yields and mortgage spreads
- After the most recent inflation report, some have argued the Fed no longer needs to support financial markets and should reduce (taper) bond purchases soon.
- As the Fed reduces its purchases though, we would expect yields and mortgage spreads to incrementally increase due to the removal of support.
- For more on our thoughts on tapering and why it’s important, see today’s LPL Research blog.
To gauge consumer attitudes on inflation, watch behavior
- Thinking of buying a car or redoing a kitchen and willing to wait six months to a year until prices come down? Then you’re likely aligned with the Fed that at least some of the higher near-term inflation is transitory.
- High inflation expectations should also bring down the savings rate, which remains historically elevated right now, since inflation eats at the value of savings.
- We do believe the baseline for inflation will run hotter over the next several years than it has in some time, but that likely still keeps it within shouting distance of the Fed’s 2% target.
- Nevertheless, even moderately higher inflation for an extended period will have some negative impact on stocks and bonds, but that means tempering return expectations rather than calling for a rout.
Still plenty of potential room to run in value stock rally
- The stretch of growth outperformance has been impressive, going all the way back to 2006, giving value potential room to run.
- Keep in mind that growth was likely undervalued relative to value when the run began, so getting back in balance would not mean a full reversal.
- Still, even getting back to the relative mid-point of the growth rally that started in 2017 would still give value stocks meaningful space to potentially extend outperformance.
LPL Research in the Media
LPL Research’s Chief Market Strategist Ryan Detrick joined Yahoo! Finance last week to discuss current market trends. You can watch the full interview here.
Economy Picking Up Speed
LPL Research explains why inflation is making headlines and why investors should not be overly concerned. Learn more in this week’s Weekly Market Commentary, available on the Resource Center, Marketing on Demand, and Broadridge.
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