In a Nutshell


By Ken Herman


It’s Costly to Listen to Negative “News”

Even though the trend for PCE data is grinding higher, the Fed apparently continues to believe that the current rise in inflation will not be long-lasting.

This past week the financial media highlighted one guru after another calling for a market correction to the tune of anywhere from 5% to 20%!  They cited “peak earnings” comparisons, rising inflation data, and the inevitability of the Fed having to walk back their stance of “no rate hikes until at least 2023”.  To these naysayers’ credit recent economic data suggests that the upcoming inflation data will confirm what worries the market most – sudden spikes that may rattle the bond market, leading to higher interest rates.

The preferred inflation metric utilized by the Federal Reserve is the change in core personal consumption expenditures (PCE).  This index is based on a dynamic consumption basket.  However, the PCE increase remains under 2% year-over-year.  Even though the trend for PCE data is grinding higher, the Fed apparently continues to believe that the current rise in inflation will not be long-lasting.

One observation about why the Fed is maintaining such a high level of conviction (regarding fiscal policy) is that the global reopening is not a synchronous economic event.  China and parts of Europe are experiencing late-stage pandemic growth, but this is not happening in several key developing and emerging markets where Covid-19 data has been surging. Those impacted economies are still suffering.  This is especially true in India, where daily cases for Covid-19 are surging.

This uneven world-wide recovery from the pandemic is dampening the narrative that the entire globe would see synchronous growth that could stoke inflationary pressures (to where central banks would have to taper QE much sooner than forecast).  The Fed recognizes these imbalances.  Apparently, that is at least one reason why they are standing pat on their “transitory” inflation forecast that the market has so far accepted.

Five months into 2021 the market is enjoying the solid tailwinds of QE, stimulus, low rates, and upward earnings revisions. (Russell 2000 +15.0% YTD, S&P 500 +11.3% YTD, Dow Jones Industrials +11.2% YTD, Nasdaq Composite +8.8% YTD)

However, five months into President Biden’s term as President, his administration has implemented more radical changes than at any time since FDR’s term of new alphabet soup agencies in 1933!   We have seen talk of DC Statehood, packing the Supreme Court, another $2 trillion spending package, a Green New Deal, and a doubling of capital gains tax rates.

Thanks to President Trump’s efforts (developing the vaccine) we can give high marks to Mr. Biden for carrying through with “warp speed” vaccine distribution, more than doubling his goal of 100 million doses delivered.  Now, on to the reality of what comes next –a booming economy, likely rising stocks, and significantly rising wage inflation.

Americans have $16.3 trillion socked away in the bank.  With so much money on tap, we don’t need to worry too much about a stock market crash, as any downward correction will be met by buying support. After all, where else will our investment dollars go?  Bonds aren’t exactly a screaming bargain nor an invitation to riches.  Real estate is hard to find in many areas, and very expensive by historic standards almost everywhere. Gold is good in small doses as a portfolio balancer, but stocks are the main component of most portfolios, and likely always will be.

So, the bottom line is: Do NOT SELL.  While Democrat policies may wound the stock market, they probably can’t kill this bull market.  Biden likely won’t get his desired doubling to a 39.6% on capital gains – or all of his other “soak the rich” tax wishes.  For that we can thank a few sensible Democrats in Washington who want to get re-elected in 2022.