Inflation as a Major Headline
Going back to 2004, inflation was still reasonably new. We can see that going into 2014, the number of people searching for inflation was significantly higher.
Now, inflation has been dominating the headlines. According to the graph below, the Purchasing Price Index (PPI) and Consumer Price Index (CPI) have gone up relative to where they have been. However, this is an annualized component. As one product moves up in value, there's usually less money for most consumers to spend elsewhere. Therefore, other products are going to pull back.
Look Under the Hood
What's driving the broad index up?
On the far left of the bar chart, we see reopening prices, such as transportation services. For example, as the economy's reopening, people are buying airline tickets. The increase in sales of those tickets will create demand, causing an increase in value. Air travel is also very energy-dependent, so there will be increases in fuel. Remember, we have temporary supply disruptions, not just the demand component.
Also, car prices have driven the CPI up. Semiconductor manufacturers anticipated lower demand in the automobile industry. The number of conductors in cars was only the ignition, but fuel injection and LCDs have become more popular. The cost is 50% of manufacturing; however, there is a significant shortage. Therefore, new cars are not coming off the lot as fast, and demand for used cars has gone up dramatically, pushing the CPI up.
Supply or Money Problem?
Traffic coming from Asia going into Los Angeles ports is causing a backlog due to high demand, ultimately making it difficult to get products in the United States. There have been about 19 ships anchored, with the average waiting time at 6.6-6.8 days before drop off. They expect the wait to be cleared by June 1st. The supply of goods coming in and the amount of imports is causing price increases.
Then, we have lumber. Sawmills have been closed during COVID because they didn't expect housing to increase rapidly. As people move from California and New York to states with low taxes and less regulation, they're leaving their houses unsold. Not only will the supply of lumber need to be steady, but it will also increase because there's a need for a lot more homes. Another unique characteristic of the coronavirus is dining out, causing a ketchup package shortage. It's both a supply and demand problem.
Then, there's the infrastructure problem, and there have been investments in renewable energy. For example, Texas had 20-30% of its energy supported by renewables and newly built gas power plants. We'll find many solutions that aren't known over the next several years as this becomes more pervasive. Therefore, new infrastructure is not necessarily dependable.
Now, we don't just have the new infrastructure, but antiquated infrastructure as well. The bridge crack in the bottom left (above) is connecting West Memphis with Missouri. Not only did it stop the traffic crossing, but the barges couldn't cross underneath it. However, whenever we look at the infrastructure bill, it's not dealing with a lot of this; it is more helping individuals and people. There's been a lot of criticism on what is considered infrastructure on the bill.
Economic Recovery
We will see rising prices in commodities, and one area that's been a big boom has been copper. Chile had an election to add complications, and the far left in-country has now gained control of the government. They want to nationalize a lot of the commodities procurement industry, which is the primary industry of Chile. They produce 67% of the copper production globally.
In addition, they're significant producers of lithium, which is crucial for electric vehicles. One of the bottlenecks for electric cars becoming the norm is the amount of lithium that we can extract. Some people are working on making it synthetic, just as much as they are with synthetic diamonds. If we can't go to the alternative energy and store other power, there will be additional upward pressure on oil.
Wages have Risen
Significantly lower wages below $60,000 have sharp increases. There will still be people getting paid more to be on unemployment and will not take the jobs. We can see it's certainly affecting the market because the lower-income areas have to compete against benefits.
The more money the lower-income gets, the more they will use for consumption. So they're going to buy more food, upgrade their shelter, and buy clothing because they have been skimped in those categories. As their wealth increases, their next dollar will be spent on those categories. It's not going to be spent on savings, stocks, and other financial assets. Therefore, we might see consumer prices from higher wages on the lower-income be an additional wave to deal with inflation.
Stimulus
If we look at the government spending and personal savings rate on the graph above, we can see that a lot of that money is still sitting idle and ready to be put into the market. There's likely to be a nice uptick in retail sales because most of this money will make it into the economy as stores begin to reopen to the total capacity.
In the market, inflation expectations on bonds are projected to be 2.5-3% inflation for the foreseeable future. It should lead to higher interest rates, but if the Fed is acting as the market and buying up bonds, you could see interest rates stay stable with inflation high.
Price Points for Dollar Cost Averaging
We can see that the S&P 500 bounced off its 50-day moving average. There's a good chance that we go through the 50-day moving average and try to get some consolidation in the market. However, there could be a concern with the infrastructure and stimulus bills being passed sooner rather than later.
Then, if we glance through the technicals above, considerable cap value is coming back while the S&P 500 is doing better than most international asset classes. We can see commodities near the top, with real estate doing well and Gold moving up.
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Disclosures:
Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.
Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
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