Notes From Last Week:
Stock markets fell last week, and Treasury yields mostly inched up as worries about inflation and the Federal Reserve created some worry among market participants. The S&P 500 was down -1.68% and the Russell 2000 Small Cap index was down -2.80%4. All S&P 500 sectors were negative for the week4. International markets fared somewhat better as the MSCI EAFE Index fell just -0.31%4.
The Federal Reserve’s Beige Book release highlighted the surging inflation and supply chain disruptions many of us have been feeling for some time. Here were the key words from our view: “Economic growth downshifted slightly to a moderate pace in early July through August … With pervasive resource shortages, input price pressures continued to be widespread. Most Districts noted substantial escalation in the cost of metals and metal-based products, freight and transportation services, and construction materials, with the notable exception of lumber whose cost has retreated from exceptionally high levels. Even at greatly increased prices, many businesses reported having trouble sourcing key inputs.”5
In addition to the supply chain problems, the Job Openings report last week from the BLS showed record job openings of nearly 11 million in July1. There is no shortage of demand for jobs. The issue is a shortage of workers. Econ 101 would suggest that high demand and low supply equals higher wages, which is a good thing for many workers. The issue is that wage price increases tend to be “sticky” and may lead to further inflation that could force the Fed to have to reduce its extraordinary measure of monetary policy accommodation sooner than they would like. Perhaps market participants started taking closer note of this last week with the Job Openings report and Fed’s Beige Book. In addition, the Producer Price Index release last week showed record increases in prices for final consumer goods, up 7.4% year over year1. This number is highly correlated with consumer price inflation and further highlights the potential issues already described for monetary policy.
Stock markets may finally be waking to the reality that higher levels of inflation may be with us for longer than many had expected. Inflation can erode corporate profit margins, hinder consumer spending, and potentially force the Fed to withdraw some of the monetary support financial markets have become so conditioned to expect. We’ve been noting these possibilities for many weeks in these notes and will continue to monitor forthcoming data. We will also be watching Washington D.C. as budgetary and stimulus issues are potentially forthcoming later this month as a Congressional stalemate is looking more likely. Being patient, balanced and neutral still seems like a solid, if unexciting, allocation position to us given the uncertainty heading into Fall.
The Week Ahead:
The Consumer Price Index, NFIB Small Business Index, Import Prices, Industrial Production, Philly Fed, Business Inventories, Jobless Claims, Retail Sales and Consumer Sentiment will all be key data in the week ahead.
Asset Management Department
Sequoia Financial Group