LPL Market Signals: Inflation, Inflation, Inflation
Thursday, May 20, 2021
Inflation was the word of the week. In this week’s LPL Market Signals Podcast, LPL Research’s Ryan Detrick and Jeff Buchbinder dive into the hotter than expected recent inflation data and explain why they still don’t see massive inflation down the road. They also discuss the current economic cycle and note it still has a good deal of life left, plus some recent changes to LPL Research’s sector outlooks.
Inflation is here, but won’t stick around
April’s Consumer Price Index (CPI) came in up 0.8% from March’s levels—the largest jump since 2008—while core inflation (stripping out volatile food and energy) soared 0.9%, the highest since the early 1980s. Jeff identifies massive stimulus, a huge reopening, constrained supply chains, and a somewhat surprisingly tightening job market have all contributed to the jump. Ryan points out that there was disinflation last year, so comparing year-over-year makes things look worse than they are. Ryan explains how the majority of the jump in inflation came from things like used cars, hotels, car rentals, and sporting events—all reopening plays. The discussion concludes with Jeff pointing out that some of the major reasons inflation has been so low over the past decade plus are still in play – things like technology, globalization, the Amazon effect, productivity, and high debt (which historically is deflationary).
Why this economic cycle has plenty of life left
This economic cycle is likely nearing one year of growth, but it is important to remember that cycles of growth tend to last many years. Ryan points out that as we’ve become more of a developed country, longer cycles of growth are common. In fact, as the chart below shows, the average cycle of growth is more than five years and there’s a good chance this cycle of growth could make it that old. Jeff opines that LPL Research isn’t expecting a 10 year cycle of growth like the previous cycle because this hasn’t been your average recession—it has likely been the fastest ever (topping the six month recession from the early 1980s) and we aren’t seeing some of the usual imbalances worked off like we usually do during a recession.
LPL Research changed their views on certain sectors and Ryan and Jeff discuss those changes. First, we upped our view on small caps to positive, thanks to a young economic cycle and extremely strong earnings. Additionally, valuations appear reasonable. Next, when we looked at sectors, we downgraded healthcare as it is more of a mid-to-late cycle play and policy appears to be a headwind. Lastly, real estate has quietly improved and maybe be a steal reopening play as more and more people go back to the office and shopping malls.
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