“Not only is there but one way of doing things rightly, but there is only one way of seeing them, and that is, seeing the whole of them.” – John Ruskin
At 8:30 am on Wednesday, May 12th the U.S. Bureau of Labor Statistics issued its much anticipated news release of the latest Consumer Price Index number. “The Consumer Price Index …increased 0.8 percent in April…over the last 12 months the …index increased 4.2 percent…this is the largest 12 month increase since…September 2008.” The next day’s Wall Street Journal described the stock market’s reaction. “The Dow and the S&P 500 post their steepest three day decline in nearly seven months, while a sharp rise in consumer prices heightened concerns that interest rates could be headed higher.” The May 31st edition of Barron’s cover story headlined “10 Ways to Cash In on the Shortage of Just About Everything.”
Pulling open the curtains and looking at the details though we find a reality that is a bit more, shall we say, nuanced. At near 16 million 10% of the US labor force is currently receiving unemployment benefits, seven times their pre-COVID level. 444 thousand who were working LOST their jobs the week of May 15th, a level twice that of the averages of pre-pandemic levels. Though the opening of the economy has created shortages in some areas of our economy both retail and wholesale inventories INCREASED in April. Last month’s Citigroup Economic Surprise Index fell below 50 for the first time since June of last year indicating that more economic data is coming in below rather than above expectations. The University of Michigan Consumer Sentiment Survey DECLINED from 88.3 in March to 82.8 in April. The Cleveland FED’s Ten-Year Expected Inflation Index, which was at 1.58% prior to the release of the CPI figure, is now LOWER at 1.57% and the Atlanta Fed Wage Growth Tracker shows that expected wage gains which were at 3.4% in December have DECLINED to 3.2%. As for the fear of rising interest rates, the 10 Year US Treasury rate, which closed at 1.607% the day BEFORE the release of the CPI figure, found itself at the close of May 28th at 1.581%.
The stock market has been accused of a lack of association with historical average valuations. The saga of the run to the stratosphere in the FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google (aka Alphabet) and Microsoft) is well known to most investors. Indeed, the 642% return for those stocks since end of year 2012 in contrast to ONLY 140.2% for the S&P 500 excluding those companies, has led some to wonder whether this has been less of a bull market than a mania in certain stocks. Interestingly though, in recent months the arguably least overvalued areas of the market have acted as a magnet for investor’s capital. The growth and value components of the S&P 500 have created nearly identical returns in the past twelve months, 40%, but in the past seven months value is up 37%, half again greater than the 24.5% for growth. The seemingly perpetually under achieving Foreign developed markets have enjoyed returns equal to that of the S&P year to date and small cap stocks 23% returns thus far in 2021 are not far from double that of “the big boys” in the S&P 500.
The .66% return for the month of the S&P 500 hides pockets of significant strength in this market. Energy +6.6%, Financial +5.9% and Materials +4.8%, Foreign Developed Markets + 3.5% and the Eurozone’s +4.4%. Not too shabby. The 60/40 Equity/Fixed Income portfolio having returned 1.3% for the month (the Equity portion returning 1.4%) is now sitting (hopefully not resting!) on an 8.7% return year to date. That’s not too shabby either.
Mark H. Tekamp, June 1, 2021