by Franklin J. Parker, CFA
The Summary
- This week is a busy one for fundamental economic data. Inflation for April posts on Wednesday, which is the big news item. We also get several Fed speeches, job openings data (JOLTS), and industrial production.
- Last week’s big jaw-dropper was April’s new jobs figures. Economists expected 1,000,000 jobs to have been created in April, instead only 266,000 jobs were created. This generated considerable buzz in the financial press, and generated speculation that the Fed may keep current policy on the table for longer. This is generally good for risk assets (like stocks) which benefit from money-printing. Commodity prices jumped in the wake of that report. Ironically, higher commodity prices should push inflation higher (which slows the Fed’s ability to print money).
- Earnings season is mostly wrapped up (88% of the S&P 500 has reported), and the results are very good—companies are reporting earnings about 22% higher than expected, which is the highest since FactSet began tracking the metric in 2008. The biggest winners have been Financials (94% beat expectations) and Technology (93% beat expectations). The notable figure, however, is earnings growth. For the first quarter, earnings growth has posted about 49% year-over-year. Of course, much of this growth is due to Covid’s effect on the figures last year at this time, but it is a strong indication that the reopening of the economy is good for investors.
Chart of the Week
Commodities have been on a tear lately. Just this morning, iron ore jumped 10%. Copper just hit an all-time high. And lumber… Lumber has increased by 377% over the past year.
Up to now, however, this increase in commodity prices has not led to an increase in core inflation (which factors out food and energy costs–the Fed’s preferred measure). Since everything we buy is built with some base commodity, why haven’t commodity prices translated into higher prices?
One answer is that it takes time for higher prices to make their way through the production chain. Companies don’t like to raise prices because it dents a consumer’s ability to buy their product. So, they hope that higher material costs are temporary and operate with thinner profit margins. Once the higher prices are psychologically set, however, they acquiesce and pass along the higher price to consumers.
Another answer is production methods. Increased automation has helped to make up for the most expensive component of the production process: labor. By investing in automated production, companies have been able to offset higher raw material costs.
Yet another answer is that all of this has happened so fast that companies simply haven’t reacted yet. Higher prices are coming, then, just as soon as everyone gets their databases updated.
I expect that the answer is a little of all three (but mostly the last one, in my view). The $10 trillion question to investors is just how much this will affect the Fed’s policy of money-printing. Will they view inflation from higher commodity prices as “transient” or a legitimate concern they need to address? If inflation hits before employment is back to full speed, will they favor employment or tamping down inflation? How will they handle our current liquidity trap dynamics and pull the cash out of the system without raising rates?
There are quite a few unanswered questions, each with very important implications for investors’ portfolios. At the moment, we need to take the data as it comes—just one week at a time.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.