Inflation Is Here To Stay
In our 2021 Market Outlook, we noted that Inflation was expected to rise by 3.5% by year-end. We have slightly exceeded that pace due to some external events that are adding to inflation. These pressures we believe are temporary in nature, but we do not hold to the view that inflation is "transitory." The Colonial Pipeline shutdown was due to hacking and not other market-related issues. The pipeline is back up-and-running, but may take a couple of weeks for all areas affected to have full gasoline supplies replenished. This external event added to already elevated gas prices as consumers get back to pre-pandemic levels of gas demand. Supply chains are already strained as the result of stop-start-stop-start struggles from the pandemic's multiple public policy blunders. Businesses have tried to maintain lead staffs and inventories in order to balance profits and losses during the pandemic. Now, there is not enough labor to handle meeting consumer demand. Companies are offering multiple incentives to bring workers back - including, but not limited to, bonuses, higher wages, and even free college tuition (which we have written about previously). This will add to inflation pressures as workers will have more money in the pockets.
Last week, the inflation print shocked the market. However, we question whether it should have. Inflation has been benign for largely two decades. It should come as no shock that inflation is normalizing. Rising yields have shocked markets this year, but should it? Yields have come off decade lows set in 2020 and are normalizing. It may take the market a while, but the easy go-go years of record low inflation are a thing of the past for now. Equities still offer the best long-term defense against inflation. Weekly Jobless Claims continued lower below the 500k level, but this was lost on a market focused on inflation. Housing and manufacturing data will be the primary focus for investors this week.
The virus numbers appear to be stabilizing in India. Daily cases have dropped to levels not seen since mid-April. The 7-day average in cases has declined 16% since the peak. Meanwhile, here in the U.S., vaccine numbers have climbed out of the lows set in early May (sub 1 mil daily doses) to nearly 2 mil daily doses delivered. The positive cases, hospitalizations, and deaths have plummeted to pandemic lows. The U.K. is now opening up and the news that vaccinated people no longer need masks in the U.S. will lead to more consumers returning to normal living conditions sooner.
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