The Long Term Investor

Here is a little article about the impact of inflation on stocks and investing. Not that I agree with the primary speculation that we are going to have negative inflation.......or the view that any inflation is going to have a negative impact as we re-open.
Inflation is rising and that probably isn't a good thing for stocks, says nearly 60 years of data

https://finance.yahoo.com/news/infl...-nearly-60-years-of-data-shows-103945243.html

(BOLD is my opinion OR what I consider important content)

"U.S. Treasury Secretary Janet Yellen may be open to seeing a period of hot inflation fueled by the one-two punch of President Biden's infrastructure plan and the natural effects of an economy trying to rebound from a bruising pandemic.

But history shows that such a robust inflationary period isn't too kind to the portfolios of investors, as they stand on guard for the inevitable higher interest rates (which tend to depress market returns) from the Federal Reserve that follow. Since 1962, both before and after 1980, Goldman Sachs Chief U.S. Equity Strategist David Kostin found the median monthly U.S. equity market real return during high inflation backdrops has been an annualized 9% vs. 15% during periods of low inflation.

The median monthly real return for the market has been 2% annualized in phases where inflation was high and rising compared to the 15% when inflation was high and falling.

During periods of elevated inflation going back to 1962, careful stock picking becomes more important as tried and true volatility plays (see tech) tend to lag. Kostin's research shows that the health care, energy, real estate and consumer staples sectors perform the best during high inflationary environments. Materials and tech stocks have fared the worst.

"Inflation can become a headwind to valuations if it leads to expectations of Fed tightening and thus higher real interest rates. S&P 500 returns have been consistently positively correlated with breakeven inflation but valuations have typically contracted alongside sharp increases in real interest rates," warns Kostin.

Market participants haven't had to look too far to find worrisome levels of inflation.

The core personal consumption expenditure (PCE) price index increased faster than expected, up 3.1% in April, according to the U.S. Commerce Department. Federal Reserve officials view the index as among the best indicators of pricing pressure in the economy. The Fed believes 2% inflation is a healthy level.

On the other hand, the April Consumer Price Index (CPI) rose at the fastest pace since September 2008, clocking in with a 4.2% increase versus a year ago. And as Yahoo Finance's Sam Ro notes in the Morning Brief newsletter, consumer expectations on inflation are on an upswing.

Even with these concerning inflation prints, Kostin said investors have started to look past them and buy into the Fed's view that inflation is transitory.

"Despite noisy economic data, rising commodity prices, and climbing labor costs, recent equity returns actually show an unwinding of investor inflation concerns. In the past few weeks, low pricing power stocks have outperformed high (7% vs. 3%)," Kostin said.

Cooling inflation fears has opened the door for Biden officials to float higher interest rates borne from rising inflation as being a good thing for the economy (and perhaps contrary to history, stocks).

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said in a weekend interview with Bloomberg News. “We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” said the former Federal Reserve chief." "

MY COMMENT

I post this for those that believe in the inflation as pushed by the media. Many of those articles....like this one....cover all sorts of negative concepts....but than....far down in the article state the disclaimer.....that.......most now dont believe there is going to be an issue. So as usual.....NEVER MIND.

I also find it interesting.....the math in this article regarding the negative returns during high inflation. We know that the markets.....at least the SP500....which most of the professionals CAN NOT beat...... averages about 10% long term. The market return......actually the median monthly return which is pretty meaningless......in this little bit of research annualizes at 9%.

In other words right at the long term average. I assume....also....from the way this little article is using the word "returns"....that they are NOT taking into account the dividends and reinvesting of dividends. If you did.....I am sure the average would be the same or a bit better than the SP500 long term average.

Garbage in....Garbage out.

But...hey who cares.....this is ALL historic data they are crunching. This stuff does not matter anymore.....it is a new normal.....it is not your fathers market.....we are now inverting based on NEW data sets and this old stuff is no longer relevant. (you cant have it both ways.....with these arguments in the short term about the markets) OR.....are we in the same old market as usual.....in spite of.....all the numerous times over the past 20 years that we have been told about the latest....."new normal".

I think I will simply continue to invest the same way I have for the past 45+ years. Since we are all basically creating our own reality now anyway.....I think I will just continue to invest based on the OLD reality......"MY" reality. For me I will continue to....identity with....the markets as my mothers market.

 

NOT much to say about the markets today......and....definately there is NOTHING that should be done in response.

We are seeing a typical Monday. We are caught up in a narrow trading range for the markets.....and....probably most peoples portfolios. We have been bound up in this range for the past couple of months.

In my opinion....much....of the reason for this trading range is the REFUSAL of the markets to accept or recognize the economic BOOM that we are starting to see.....and....that we will see for the next 1-2 years going forward. Add in an EMPHASIS of the trading mentality.....and....bingo, you get what we are experiencing right now. Perhaps in a few months when we see second quarter earnings...the markets will decide that enough is enough and reward GREAT performance. If not than.....it WILL happen eventually....and we will move smartly past the current market levels.

Till than.....we sit and wait......a common activity for long term investors. That is why it is a good thing to immerse yourself in work, life, family, kids, etc, etc......to pass the time. IDLE HANDS are the DEVIL'S WORKSHOP........as are idle minds.

For those that own dividend stocks.....you take solace in this sort of range bound market by being thankful for the shares that your dividends are providing each time the re-invest.

Like all range bound markets......the other good thing is.....we are forming a nice base for the next move up. As great fundamentals pile up......and the economy booms......stocks that are deserving are coiling up like a spring....when things break loose they will unleash a lot of pent up excitement and move smartly forward.

As in.......ONWARD AND UPWARD.

 

I think this little article is a good.....momentary....summary of where we are at this VERY moment in time. A few hours from now....who knows?

U.S. Stocks Decline Amid Inflation, Tax Concerns: Markets Wrap

https://finance.yahoo.com/news/asia-stocks-set-track-u-214819575.html

(BOLD is my opinion OR what I consider important content)

"U.S. equities declined and Treasury yields rose as investors weighed inflation risks and the potential impact of a minimum corporate tax that could enable foreign governments to impose levies on big American companies.

The S&P 500 and Dow Jones Industrial Average fell after earlier climbing toward all-time highs. Losses in megacaps including Tesla Inc., Apple Inc. and Amazon.com Inc. led the Nasdaq 100 lower. Ten-year U.S. Treasury yields rose from the lowest since late April after Treasury Secretary Janet Yellen said on Sunday a slightly higher interest-rate environment would be a plus.

The pullback in equities comes as recent data, including Friday’s jobs report, seemed to vindicate the Federal Reserve’s dovish stance on monetary policy. Investors are trying to strike a balance between the potential for higher interest rates and not missing out on a rally driven largely by massive government stimulus. The U.S. consumer-price index report due Thursday will be one of the last major economic indicators released before the Fed’s rate decision later this month.

“Though the jobs numbers were a bit of a mixed bag, they suggested solid progress but room for improvement, which could temper action on behalf of the Fed,” said Chris Larkin, managing director of trading and investing product at E*Trade Financial. “As we hover around record highs, keep in mind that it’s normal for the market to take a bit of a breather as we kick off the week.”

Yellen said President Joe Biden should push forward with his spending plans even if they spark inflation that persists into next year. Meanwhile, the Group of Seven rich nations secured a landmark deal that could help countries collect more taxes from big firms and enable governments to impose levies on U.S. giants such as Amazon and Facebook.

Biogen Inc. touched a record high after it received approval for its controversial Alzheimer’s disease therapy. Competitors including Eli Lilly & Co. and AC Immune SA also rallied, helping push the Nasdaq Biotech Index toward the highest since February. Tesla Inc. slumped after the electric-car maker called off plans to build a longer-range version of its high-end sedan.

Underperformance by the tech-heavy Nasdaq 100 suggested investors were looking beyond pure growth narratives to sustain gains. The Russell 2000 Index rose for the third straight session on Monday, though it remained more than 1.5% below its June all-time high. European stocks advanced, with carmakers and consumer-products companies outperforming."

MY COMMENT

YELLEN....there is another person that needs to just.....STFU. She was....barley adequate.....as FED chair. As Treasury Secretary....a total disaster in terms of her pronouncements and their timing.

It will be interesting to watch all this.....GLOBAL INCOME TAX.....stuff. Unfortunately.....we know how this sort of stuff always ends up....higher taxes. AND....over time the direction of the global tax rate will be the same as always......ever HIGHER. Of course......since we are the dominant WORLD economic and business power......this "stuff" is going to hit the USA and our corporations MUCH more than any other country. I suspect that this along with the other tax policies......we are on the verge of instituting........WILL drive many businesses out of the country.Thank God that companies and corporations will be able to simply pass this added cost of doing business on to the consumer......where it belongs.

Seems like we will eventually need a.......WORLD......personal income tax on individuals. That is in the far future.....a minimum of 15-25 years.....but I have no doubt it will happen some day in the distant future.

 

Ended up....technically....in the red....but....dead flat for the day. I also ended the day....TIED....with the SP500 for the day.

It was nice to see Nvidia turn around and end the day in the green. The STREAK continues.......but.....it is still a long way to the split date on July 20. I am curious to see if the stock can pull off a $200+ gain from the split announcement to the day of the split.

 

I have to say.....I tend to be toward the negative side on TESLA. They got off to a fast......and dominant....start in the EV market....especially the sale of credits. BUT...the car business....that is a whole other can of worms. I have serious doubts that they can maintain their dominance over the next ten years.

This little article.....and the recent moves with Musk stepping back on products....makes me very WARY. I made good money from the stock in less than a year....but....I am not sure the future is going to be so rosy.

Elon Musk cancels the 500-mile range version of Tesla's Model S

https://www.cnn.com/2021/06/07/business/elon-musk-tesla-model-s-plaid-plus/index.html

(BOLD is my opinion OR what I consider important content)

"Elon Musk is pulling the plug on his promised Tesla Model S Plaid+ super car about a year before it was expected to go on sale. Tesla still plans a "Plaid" version of the car. In a tweet on Sunday, the Tesla CEO said that Plaid+ was being canceled because there was "no need, as Plaid is just so good."

But Tesla had talked about the Plaid+ being able to go more than 500 miles on a single charge, while the standard Plaid version is advertised as being able to go 390 miles. Both versions were to have three motors, more than the two in other top-end versions of the Tesla. And Tesla said both Plaid and Plaid+ would be able to accelerate from 0 to 60 in about 2 seconds, making them the fastest production cars ever.

The Plaid+ was set to be $30,000 more expensive than the standard Plaid version, costing just under $150,000. All the versions of the Model S and the high-end Model X SUV together represented only 11% of Tesla sales last year, with the lower-priced Model 3 sedan and Model Y SUV becoming the mainstays for the company. But the Model S and Model X likely have better profit margins than the Model 3 and Model Y, making them important models for Tesla's lineup.

Trouble for Tesla?

The delays in the new versions of the Model S and Model X, and the dropping of the highest end version of the Model S could point to some troubles at Tesla.

"This is not the news that Wall Street wanted to hear," said Daniel Ives, tech analyst at Wedbush Securities. "At the surface the excuse makes sense, but it also feels like 'The dog ate the homework.'"
Shares of Tesla were slightly lower in premarket trading Monday.

Typically, a redesign of a new version of a car takes production offline for a matter of weeks. But Tesla didn't make any Model S sedans or Model X SUVs in the first quarter of the year and it is only now rolling out a redesigned version of the car.

An unveiling of the new Model S, with a distinctive rectangle open steering wheel rather than the traditional round steering wheel, had been set for June 3. But that was pushed back to June 10 because Musk announced last week it needed some last minute tweaks.

The entire auto industry has been struggling with a shortage of computer chips that has caused plants to shut down and automakers to shift what supply of chips they had to their best-selling vehicles. Musk told investors in April that the shortage of computer chips was a "huge problem."

Last week Musk tweeted that rising costs of raw materials was leading to price increases for the Model 3 and Model Y. The price of the upper end Model S and X were not increased, though.

"At the high end the Plaid+ was niche demand to begin with but the chip shortage has forced Musk & Co. to make some tough choices on the production front," Ives said. "The last few months have been choppy for Tesla and this adds to the overall agita."

Musk did not identify which raw material prices were causing problems. Prices for lithium, a key material used in EV batteries, have more than doubled in trading markets. Cobalt, another key material for batteries, is also sharply higher though it has retreated from a high earlier this year.

How much Tesla is paying for those raw materials under its supplier contracts is unknown. The same is true for metals used elsewhere in the car, such as steel, aluminum and copper, which have also seen in prices traded in public markets rising.
The unusual "Plaid" name comes from "Spaceballs," a 1987 Star Wars parody from director Mel Brooks. In "Star Wars," when spacecraft enter hyperspace, the stars appear to become streaks of light. In Spaceballs, the spacecraft go even faster and the stars turn plaid."

MY COMMENT

The key for Tesla is going to be making the transition from making their money from the sale of credits....to....making their money producing cars. With the EV industry being so young and EVERYONE now jumping in....it is going to take a while for the busines to sort out.

In favor of Tesla is the number of factories that will be coming online in the next year or two. BUT......the traditional auto companies know very well how to design and ramp up production of new vehicles including EV vehicles.

It will be an EPIC BATTLE for dominance. One that I will watch from the sidelines....for the moment.

 

This is also a.....possible....indicator of problems or a shake up at Tesla.

Tesla veteran and trucking chief leaves company

https://finance.yahoo.com/news/teslas-heavy-trucking-unit-chief-220647362.html

(BOLD is my opinion OR what I consider important content)

"Long-time Tesla Inc executive Jerome Guillen, who oversaw its Semi electric trucks slated to be launched this year, has left the company, Tesla said on Monday, barely three months after taking over the role.

Guillen, who has been with the company for over a decade since starting as a Model S program director in 2010, oversaw Tesla's entire vehicles business before being named president of the Tesla Heavy Trucking unit in March. He was one of Tesla's top four leadership members, including then CEO Elon Musk

Dan Levy, a Credit-Suisse analyst said in a note the departure is "negative given Guillen previously viewed as central to Tesla" as he was "arguably key in stabilizing auto biz post Model 3 launch" in 2017.

Tesla is yet to begin delivering its battery-powered Semi electric commercial truck, with Musk saying in recent months that battery cell supply constraints could delay its mass production to 2022.

Musk also said in January that Tesla would be able to produce the Semi when its new 4680 cells could be produced in volume, alleviating a battery shortage.

Separately, Musk said on Sunday that Tesla has canceled its longest-range Model S Plaid+, which would use 4680 cells and whose production had been delayed to next year.

"They made a big deal about 4680 ... we are just upset the first (car with) 4680 apparently was abruptly canceled. This just raises more questions that they need to address," Louis Navellier, chief investment officer at Navellier, said.

Tesla shares fell 0.7% in after market trading.

Guillen was one of only a few long-serving executives at Tesla, which is known for the high turnover rate of its executives.

RJ Johnson, who headed Tesla's Energy operations to sell solar and energy storage products, left the company after less than two years, according to his LinkedIn profile. He moved to startup Stealth Mode."

MY COMMENT

Could indicate issues. OR......could indicate that these executives are now INDEPENDENTLY WEALTHY....and....free to move on.

 

I like this sort of simple indicator.

5 signs that shopping is getting back to normal

https://www.cnn.com/2021/06/05/business/shopping-pandemic-back-to-normal/index.html

(BOLD is my opinion OR what I consider important content)

"When coronavirus began to spread across the United States, retailers took action. Social distancing stickers were slapped on floors, mask mandates were implemented and, perhaps more crushingly, free samples disappeared.

But as vaccination rates rise, some are feeling more comfortable about resuming their prior routines — and major retailers are returning aspects of the pre-pandemic shopping experience.

Here's how shopping is becoming more normal lately:

No more masks

Target (TGT), CVS Health (CVS), Starbucks (SBUX), Walmart (WMT), Trader Joe's and many other national retailers loosened their facial covering policies in May for vaccinated customers. That's when the Centers for Disease Control and Prevention announced that fully vaccinated people don't have to wear masks or practice social distancing indoors or outdoors.
Unvaccinated shoppers, however, are are asked to keep wearing masks in many stores. Similar rules apply for store employees.

Samples return

Costco (COST) and Sam's Club are bringing back free food samples, albeit with some pandemic-induced changes: Both warehouse chains announced that they're installing Plexiglas at sample stations, handing out individually wrapped samples and making them in smaller batches.

Sam's Club is also introducing food trucks that will hand out samples from its private label outside stores,and the chain is testing other "new ways to sample items" including bringing free tastes to members as they check out at the register.

Food courts are back

Fans of Costco's food court missed out after Costco shut down seating areas and pared back the menu to hot dogs and pizza for takeout only. But now, the company has brought back the chicken bake and recently began adding back ice cream and smoothies to the menu.

Costco is bringing back tables and chairs in stores that have outdoor seating areas, and indoor seating will be back with more physical separation at most of its 560 US locations as local restrictions allow. Tables will have four seats instead of six or eight and half the seating capacity as before.

In other changes, Costco is also adding new and improved churros to menus, which will be available by July 4. Ice cream is also replacing its frozen yogurt this summer.

Fitting rooms reopen

Target's fitting rooms reopened at all of its stores on June 1.

"We'll continue to frequently disinfect and clean our stores throughout the day, as we have throughout the pandemic, and have team members dedicated to high touch areas like fitting rooms," a company spokesperson told CNN Business.

Kohl's (KSS), Gap (GPS) and Nordstrom (JWN) also have reopened fitting rooms in recent months, except in areas where they're prohibited by local rules.

Longer hours

Walmart expanded its hours as of Saturday, and it now opens an hour earlier at 6 am. Pharmacies and vision centers will return to pre-pandemic hours on July 3. The retailer also ditched capacity restrictions and added seats back to its auto care centers.
"As Covid-19 cases leveled out, we expanded our closing time late last year and now, with the number of fully vaccinated Americans growing higher every day, we believe we can adjust hours once again," the company explained in a release."

MY COMMENT

Little things....but....little things are often good indicators of business and the economy. I like these sorts of anecdotal indicators. Get enough of these things happening and you end up with a real difference in the economy and business. We NEED to get back to a more NORMAL feel to everyday life.

 

Bitcoin is down BIG....again. As I post this it is at $33,048.....down by 10% for the day....so far. ETH is at $2,519......down by 11% for the day....so far.

This BIG drop in Bitcoin and ETH is a BIG lesson to young, inexperienced, investors that think they are investing by trading in HIGHLY SPECULATIVE....."stuff". MORE......of the new normal......the old rules dont apply.......reality check.

UNFORTUNATELY for them.....although fortunately for all the rest of us......the old rules DO still apply. Investing according to message board CROWDS and COMMENTARY is simply dumb. The vast majority of people that play this game WILL lose their money in the end. What is sad is the fact that many will have some level of early success......and....as a result will commit more and more money to this sort of investing. Many will be suckered into using leverage by their early, short term success. AND....sooner or later they will get HIT with a big drop and will.....LOSE IT ALL.

A necessary......but very sad lesson.....for the majority of these young speculators. Unfortunately MANY of them dont even realize the level of their own speculation and the danger.

 

I use SCHWAB for all my brokerage needs.....and....as a result I have often read their little articles and commentary. I have found the articles to be routinely in line with my thinking. SO...here is their mid year analysis.

2021 Mid-Year Outlook: U.S. Stocks and Economy

https://www.schwab.com/resource-cen...year-outlook-us-stocks-and-economy?cmp=em-QYC

(BOLD is my opinion OR what I consider important content)

"Key Points

• Second quarter is likely the peak growth rate for both the economy and corporate earnings; with positive economic surprises waning.
  
• For now, inflation looks “transitory,” but labor market slack holds the key to whether it becomes more persistent.
  
• Sentiment, including margin debt and CEO confidence, suggest some contrarian market risk.
  

I’m a “rock chick” and nearly all my written reports are titled with a rock song title … but our twice-yearly outlooks don’t leave room for that levity; so I’ll weave them in another way. Last year at this time, I was asked on a virtual event what song(s) I felt best characterized the environment in which we were living. Immediately I thought of both Gimme Shelter by The Rolling Stones and Don’t Stand So Close to Me by The Police. Today I might choose Back in the Saddle Again by Aerosmith, reflecting the fact that we are in the midst of the U.S. economy likely surpassing its pre-pandemic level as measured by gross domestic product (GDP). This is unquestionably good news; but may not mean smooth sailing for the stock market as you’ll read below.

Boom-what?
The question as we head toward the second half of the year is whether we’re facing a long-lasting boom (aka, a new “Roaring Twenties”), a boom-settle, or a boom-bust scenario. At this point, I lean toward the boom-settle scenario; in part because we may be facing another peak in the growth rate for both the economy and corporate earnings (distinguished from peak growth). Last year at this time we were in the midst of the second quarter of 2020, when GDP contracted by -31.4 (quarter-over-quarter annualized rate). That was followed by the eye-popping initial rebound of +33.4% in the third quarter; with the fourth quarter coming in at a more tepid +4.3%.

This year’s first quarter saw growth of +6.4%, with the second quarter expected to jump to +9.4% as the economy fully opens. Bloomberg’s tracking of economists’ estimates suggests this will be followed by steadily descending, but still positive, growth rates in the subsequent two quarters (+6.8% and +4.8%, respectively). In fact, after some epically strong readings, the latest economic data has been mixed-to-weaker; including worse-than-expected readings for personal income, new and pending home sales, durable goods, consumer confidence and the Chicago Fed’s National Activity Index.

As you can see below, the Citi Economic Surprise Index—which measures how economic data is coming in relative to expectations—has come significantly off the boil relative to its peak last July. The accompanying table shows that as the index descended historically, so did annualized returns for the S&P 500.

Surprise?


Source: Charles Schwab, The Conference Board, ©Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/, as of 2Q2021. Yellow dotted lines represent Citi Economic Surprise Index readings of above 22 and below -16. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly Past performance is no guarantee of future results.

Liquidity drain?
A contributing driver of less-robust economic data is likely the fading impact of fiscal stimulus thanks to direct stimulus checks being in the rear-view mirror; and supplemental unemployment insurance set to expire in early September (for those states which opted not to end it sooner). Although the Federal Reserve has not yet begun to put some of its crisis tools back in the toolbox, the impact of waning fiscal stimulus has led to a reversal in money supply growth, as you can see below. In the meantime, the velocity of money—the rate at which money is exchanged in the economy—remains historically low. This is one reason to hope that the current bout of inflation is indeed transitory, which continues to be the Fed’s mantra. [For more on inflation, see https://www.schwab.com/resource-center/insights/content/world-inflation-transitory-or-more-nefarious]

M2 Growth Coming Off Boil


Source: Charles Schwab, Bloomberg, Federal Reserve Bank of St. Louis, as of 4/30/2021. The velocity of money is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity is increasing, then more transactions are occurring between individuals in an economy.

In addition, real M2 growth is now exceeded by industrial production growth, which means there has been negative liquidity growth over the past year. Speaking of liquidity, we expect the Fed to begin telegraphing the first step in normalizing monetary policy; perhaps as soon as the mid-June Federal Open Market Committee (FOMC) meeting. Including in the recent release of the minutes of the April FOMC meeting, and by several Fed officials since, discussions are underway about when to start tapering the Fed’s balance sheet. Its current $120 billion per month pace of purchases of Treasuries and mortgage-backed securities (MBS) will likely be pared steadily, but gradually, given the risk associated with its massive $7 trillion balance sheet. Like was the case in 2013, when the Fed announced a balance sheet tapering and stocks had a “taper tantrum,” the market could be at risk of a pickup in volatility.

Labor market, inflation and Fed’s reaction function
Key to the outlook for the economy broadly, as well as Fed policy and inflation, are labor market conditions. Small businesses—which are the largest net U.S. job creators—have robust hiring plans, as you can see below.

Small Business Hiring Plans’ Surge


Source: Charles Schwab, Bloomberg, as of 4/30/2021. NFIB’s (National Federation of Independent Business) Hiring Plans Index is based on Small Business Economic Trends Data which is a monthly assessment of the U.S. small-business economy and its near-term prospects.

Notwithstanding the weak April jobs report (this was written prior to the May report), the NFIB survey—as well as other leading labor market indicators, like job openings—point to a pickup in job growth. Payrolls are still more than 8 million shy of pre-pandemic levels; a gap unlikely to close this year unless we see a string of million-plus payroll gains. We have posited that although there are ample near-term upward pressures on inflation; absent a significant reduction in labor market slack and a sustainable increase in wage growth, inflation is unlikely to morph into a 1970s-style systemic wage/price spiral version. [https://www.schwab.com/resource-center/insights/content/is-1970s-style-inflation-coming-back]

To rule that out, we need to keep a close eye on wage data; but would caution against using the standard average hourly earnings (AHE) metric, as it can be heavily-skewed by wage-level mix-shifts, as you can see below. When lower-wage jobs were lost en masse last year, it biased the average way up, and the opposite is happening now. That’s the way the math of a simple average works. That is why we prefer other metrics; notably the employment cost index (ECI), also shown below, which for now remains subdued.

Pandemic-Fueled Wage Volatility


Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics (BLS), as of 4/30/2021. The Employment Cost Index (ECI) is a quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation.

As mentioned, there are ample upward pressures on inflation at least near-term; including base effects (year-over-year comparisons to last year’s pandemic-related decline in inflation), and supply chain disruptions alongside rising demand. Raw material costs for businesses have spiked; and as such, the spread between the consumer price index (CPI) and producer price index (PPI) is historically wide; as you can see below. In fact, it’s the most negative since 1974. As you can see in the accompanying table, when the spread has been negative historically, stock market returns have been weaker; however as the spread narrowed and moved back into positive territory, stocks fared better.

Near-Record Spread Between CPI and PPI



Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 4/30/2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Another spread that corroborates the data above is between the new orders and prices paid components of the Institute for Supply Management Manufacturing (ISM-M) index. The latest release of the ISM-M data kept the spread in deeply negative territory (-21%), which is up slightly from the prior month’s reading of -25% (the lowest since August 2008). According to SentimenTrader, when the spread was below -25% historically (data back to 1948), the S&P had an average -6% annualized return. We will be looking for a narrowing of these spreads, which may be aided by the retreat in some commodity prices; but will also require some easing in supply chain disruptions, which could persist.

Real earnings yield’s plunge
The recent spike in inflation has put a significant dent in one of the few stock market valuation metrics that had not been in the expensive camp. The real earnings yield of the S&P 500 is the inflation-adjusted earnings/price ratio (the inverse of the P/E ratio). As you can see below, it’s now negative to a degree not seen since the 1979-1980 time period.

Real Earnings Yield Goes Negative


Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 4/30/2021. Real earnings yield is defined as S&P 500 current earnings yield minus y/y % change in CPI. Past performance is no guarantee of future results.

There have been five prior occurrences of the S&P 500’s real earnings yield turning negative for the first time in at least three years: August 1973, January 1980, August 1987, March 2000 and July 2008. With the exception of the 1980 occurrence, each was followed by weak equity market returns over the subsequent six-to-12 months. According to SentimenTrader data, three months after each of these occurrences (using month-end data), the S&P 500 was down every time; with a range of -3% in 2000, to -30% in 1987 thanks to the market crash that October.

Earnings on fire
In the interest of not being a total Debbie Downer with regard to equity market valuations, the relatively good news is that the traditional P/E ratio has been falling courtesy of the rapid acceleration of earnings growth since last year’s low. S&P 500 earnings bottomed in the second quarter of last year at -31%, which was followed by -7% and +4% in the third and fourth quarters, respectively. This year’s first quarter was significantly better than expectations, with growth coming in at +52% year-over-year. The consensus expectation for the second quarter now sits at more than +62%; after which earnings growth is expected to slip to +24% in the third quarter and +16% in the fourth quarter.

In essence, the U.S. economy and corporate earnings went from a depression-like bust to a wartime-like boom in the span of a year. Companies cut operations to the bone amid the early phase of the pandemic; then courtesy of record-breaking monetary/fiscal stimulus, the economy quickly found its footing. The study below by The Leuthold Group looked at every recession in the post-WWII period and examined the profit recovery one year after each recession low, compared to the prior expansion’s peak profit. Based on Bloomberg’s S&P 500 earnings-per-share (EPS) consensus for 2021 of $185 (which may prove too low given that first quarter growth came in at an annualized run-rate of more than $200); by the end of this year, earnings are likely to be more than 20% above the prior peak.

Epic Earnings Rebound


Source: Charles Schwab, Bloomberg, The Leuthold Group. *Based on median Bloomberg estimate of $185 EPS for 2021. Past performance is no guarantee of future results.

So, although the year-over-year growth rate for earnings is likely to peak in the second quarter, earnings should remain strong throughout the remainder of this year. Of course, the stock market has been moving up as well; but with its pace undercutting the pace of earnings growth, the forward P/E has been trending down, as you can see in the chart below. I expect stock market gains to continue to be lower than earnings gains, which would mean a further retreat in the S&P’s multiple. That said if inflation continues to accelerate, it may mean some downward macro pressure on higher-multiple segments of the market.

E Doing More of Market’s Heavy Lifting


Source: Charles Schwab, Bloomberg, as of 5/28/2021. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data

Emotional rescue
When discussing valuation, I often tie it to investor sentiment. Investors think of most valuation metrics as fundamental and quantitative in nature. In the case of a traditional P/E, there is a quantifiable numerator and denominator. However, the reality is valuation is to a large degree a sentiment indicator; or perhaps better put, an indicator of sentiment. There are times (like the late-1990s, and perhaps today) when investors are willing to pay lofty multiples for certain stocks; and other times (like early 2009) when investors are unwilling to pay even historically-low multiples for stocks.

I want to focus attention on sentiment via two metrics particularly relevant to the current environment. The growth in investors’ margin debt has rightly received a lot of attention over the past few quarters. As you can see in the charts below, overall margin debt (first chart) is not far from $1 trillion; with the 15-month rate of change (second chart) in rarified air based on history.

Margin Debt Soars



Source: Charles Schwab, ©Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/, as of 4/30/2021.

Our friends at Ned Davis Research have looked at those points in time when margin debt hit a peak and then began descending—considering them “sell signals.” Following those signals, the average subsequent returns for the S&P 500 for time periods ranging from three-to-18 months since 1970 were all in negative territory—although not to a significant degree. I will be keeping a close eye on margin debt—especially for a possible inflection point this year. For now, it’s not a contrarian indicator; but a reversal would represent a market risk. For comparison purposes, the table also highlights the average subsequent returns following “buy signals” (when margin debt hit a trough and then began ascending), which tended to be extraordinarily strong.


Source: Charles Schwab, ©Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/, as of 4/30/2021. Sell signals generated when rate of change in margin debt falls below 48%; buy signals generated when rate of change in margin debt rises above -21%. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Another sentiment measure on which I keep an eye, which is not directly associated with investors, is CEO confidence. As measured by The Conference Board, CEO confidence is at a record high as you can see in the chart below. Historically, this has worked as a contrary indicator as it possibly signals the environment is “as good as it gets,” which you can see in the accompanying table.

CEO Confidence Soars



Source: Charles Schwab, The Conference Board, ©Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/, as of 2Q2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Factors to consider
This year has been characterized by several shifts in leadership. As highlighted in the charts below; while growth factors dominated performance from the market’s low in March 2020 to early-November last year; this year has been a different story. Seen in the second, shorter time frame chart, traditional value factors—like free cash flow yield—as well as negative earnings (where “leverage” is greatest when growth surges), have significantly outperformed the long-term growth factor.

2020 Growth; 2021 Value



Source: Charles Schwab, Cornerstone Macro, as of 5/28/2021. Factors based on sector-neutral S&P 500. Free cash flow yield is defined as the last twelve months of free cash flow divided by the share price. Long-term growth is defined as mean estimated five-year earnings per share growth. Negative earnings is defined as last twelve months of net income less than 0. Past performance is no guarantee of future results.

By the way, stocks that screen well on traditional value factors have tended to be outperforming those that screen well on traditional growth factors across all 11 S&P 500 sectors. In fact, the spread of outperformance is greater among the three “growthiest” sectors: Technology, Communication Services and Consumer Discretionary. In other words, it’s paid to be value (factor)-oriented, even when looking within traditional growth sectors.

In sum
Looking ahead to the second half of 2021, we think there are some notable market risks associated with the combination of peak economic/earnings growth rates, higher inflation, Fed policy and some stretched sentiment conditions. Specific to Fed policy, the Fed has been trying to establish “hotter” inflation to counteract the negative effects of inflation having run “cold” for so long. This is a unique period relative to history; with the Fed actively pursuing higher inflation. Formally, the Fed has shifted its reaction function associated with both its mandates—inflation and employment—from being “outlook” based to “outcome” based. In essence, it means the Fed has gone from driving via the windshield to driving via the rear-view mirror. They might still get where they want to go; but there is the risk that markets decide they’re getting behind the inflation curve.

For the stock-pickers out there, we suggest a “hybrid” approach—with an eye toward sustainable growth, but at reasonable valuations—as well as quality factors, like balance sheet strength. For the asset allocators out there, we suggest this is a time for discipline; including around diversification (across and within asset classes) and periodic rebalancing. As a reminder, just as panic is not an investing strategy, neither is FOMO.

MY COMMENT

A nice summary of some of the data and where we have been over the past six months. As to the future......it is just as OPAQUE as ever. The answer......as usual.....a long term horizon.

 

From a post above:

"I'm curious, as a long-term investor, why you're bearish on Crypto when it has been cyclical like this since it's inception. It's had huge drops like this many times, and then rallies higher. As a long-term investor, I believe you've said you don't judge an investment by the short-term volatility, but by it's YOY performance. Bitcoin is up 10% on the year. Ethereum is up like 250% on the year. What lesson should the young, inexperienced "investors" as you call them learn from this, when investments are long-term?"

I dont believe I have EVER said I was bearish on crypto. In fact I have NO OPINION on crypto over the long term.

What I DO NOT agree with is the rampant speculation and trading by young males in this and other "stuff". They are NOT long term investors as you imply. They are short term gamblers and most of them will LOSE their money. They are ......mostly....uninformed and buying based on conformity and peer pressure and fad and the excitement of gambling.

Now as a long term investment? Just for discussion:

I am sure there are some that bought crypto years ago and are holding it for the long term. BUT....they are a tiny minority. And for them I would ask.....what is the inherent value of your long term investment? It does not produce anything, There are no sales, there is no revenue. So what is the UTILITY of your investment holding.....since the only thing that I can see that could potentially give crypto value is some....utility.

The only thing I can see anyone saying is that....it is and will be a world wide medium of exchange....a type of money. BUT....as long as the tax laws remain as they are I dont see this in the slightest. EVERY time you buy or spend Bitcoin you are racking up a short or long term capital gain or loss. Who is going to buy a toothbrush for $2.49 and have to figure the capital gain or loss on that transaction? It is impractical and unusable as a substitute for money due to the tax complications.

I view it the same as buying gold or silver of some other commodity....although those items have physical use and presence and therefore value. Again....what is the basic value of a Bitcoin based on in terms of utility. And if there is NO utility.....is it a realistic investment for most people?

Now government has the power to adopt some crypto as a substitute for money or create their own.....but.....we are not there yet and when they do....owning that government crypto will be like currency trading....not exactly a long term investment.

In addition the volatility that we see with crypto is not short term volatility....it has been long term volatility.....and often extreme. It happens due to the speculative nature of crypto and the fact that it is being "traded"....not "held".

BOTTOM line......my view.....the vast majority of crypto holders are speculating and trading....they are NOT long term investors in crypto. The.....perhaps 10% that are long term holders and actual investors.......are the exception.

People are free to trade or speculate as they wish......and I dont care if they lose their money. BUT.....I will point out behaviors and other things on here that I believe are a BIG DANGER for people reading this thread....at least in my opinion.....and....will NOT lead to financial security over the long term.

I am curious as to your view on what gives crypto ANY inherent value?

 

You are racking up some BIG money Emmett as a homeowner. I think that is a great thing and hope you do very nicely. A good boost to your net worth. I like it.

It is pretty crazy....but who is going to turn down $50,000 or $100,000 in added value.

 

I appreciate the discussion T0rm3nted........and I am actually interested in your view on the above.