CAMS Weekly View from the Corner – Week ending 7/23/21
July 26, 2021
Price inflation – price inflation – price inflation! Around every conversation it seems cost of living concerns pop up in some form or fashion. Interestingly, this observation is backed up by a recent poll of Americans whereby a notably rising concern is price inflation. In light of the laundry list of issues facing the citizenry price inflation moving up the ranks is noteworthy. In recent months we have offered editions where we shared interesting developments from the bond market. Our focus has been specific to the Treasury bond market. At different times since late 2020 we shared how markets were sending price inflation messages including the Treasury market. What caught our attention and remains to date is how the Treasury market turned tail on the inflation concern that itself was lathered up about just months previous. This has since been corroborated by other markets whereby, via market messages, the inflation concern has become less of a concern. A visual will make quick sense of this flip in forward expectations.
Click For Larger View: https://schrts.co/MFuVuaeS
Above is a one year chart of 30 year Treasury bonds on a yield basis. In light of their length to maturity they are quite sensitive to inflation concerns and the general economic backdrop. Latter 2020 through early spring 2021, via the black line, we can see the relentless uptrend in yields. This means these bonds were being sold off by bond market participants and in so doing their yields moved consistently upward. They move inversely – prices down/yields up. Then beginning mid-March up to current day participants have done the opposite – buying these bonds in droves and hence sending their yields consistently lower. This has been such a consistent message that for the past three weeks yields have been at or below their 200 day average which is depicted via the gradually sloping red line. When a market moves below and struggles to regain its footing above the average of the previous 200 days we know it is a solid message from participants. Inflation Expectations Interestingly, we have seen a development in forward views whereby the bond market disagrees with the citizenry. As offered, via polls as well as happenstance conversation, the citizenry is quite concerned about the forward view of price inflation. A visual underlines this collective view.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=FECn
Above is a decade chart of the one year forward expectation of price inflation by survey respondents. In 2021 this has moved straight up nearly doubling from its launch point at the beginning of the year. In addition, current price inflation expectations are the highest we have seen in over a decade. With all of the above this is boiling down to a Bond Market versus Main Street type of forward view cage match if you will. Importantly, somebody will be wrong here. The Treasury market is a very smart market. They get paid to obsess about the forward view always. They are not infallible but we take their message seriously. They are seeing a weaker economic backdrop and corresponding reduction in price inflation measures in the future. With the relentlessness of their message, as shared above, we are beginning to wonder just how weak do they see this economic backdrop becoming and are stock market participants prepared for such a backdrop if it develops in forward months. Also as shared in previous editions the stock market has become questionable inside itself. As mainstream indices hold up, numerous less advertised indices have performed poorly since the bond market began its downtrend in yields back in mid-March. Interestingly, the mainstream stock market indices found a notable pothole last Monday only to pull up and out of it as the week unfolded. Was that a shot across the bow type of message? There are numerous cross-currents throughout markets right now. This offers a disjointed message which is a counter message from a view that all is well in the various market landscapes. For all to be well if you will, we need to see the bond market ease up on its consistent downtrend in yields and a simultaneous improving structural health inside the stock market. At this juncture, neither is present but we are watching for any evidence to the contrary. I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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