As the economy recovers from its COVID bust, cyclical stocks have enjoyed a nice run. Based on a geo-weighted index of the primary, economically sensitive sectors comprising the S&P 500 Index—Materials, Industrials, Consumer Discretionary, and Financials—cyclicals have outpaced by +4% this year and close to +10% over the last year, but it has not been uneventful.
The current Bull Market has so far exhibited an attractive self-sustaining character. The accompanying charts highlight the relative performance of eight distinct investment attributes: Value, Growth, Cyclical, Price Momentum, High Quality, Small Cap, EM, and High Beta. Although each of these has had its day in the sun, no single investment attribute has persistently dominated since the Bull Market began after the March 23, 2020, Bear Market low.
A sustained period of significant inflation is probably the biggest risk facing investors. Signs abound that inflationary pressure is building. The S&P GSCI Commodity Price Index has more than doubled from its lows last April, bond-market breakeven rates have surged this past year (i.e., illustrating bond-investors’ inflation expectations), and both manufacturing and service-sector companies report some of the strongest selling-price flexibility on record.
Last week, a unique character of the contemporary, economic recovery was highlighted. Blowout numbers were widely anticipated for the retail sales report on Thursday and expectations were huge. Nonetheless, when the early-morning report was released, the actual numbers were nearly double the elevated forecasts.
Not surprisingly, confidence among the highest earners is generally more positive than that of low earners. However, the extent of this “confidence-differential” will vary over an economic cycle. The confidence-differential compares the results of the highest 33% of earners to that of the lowest 33% of earners, based on the University of Michigan’s Consumer Sentiment Index.
Investors lose a lot of sleep worrying about the Federal Reserve. Should they?
“Fed Legends” are plentiful and as heeded as ever. Several popular adages highlighting their importance have survived the test of time, including: “Don’t fight the Fed,” “Three steps and stumble,” and “The stock market is just one big sugar high.”
It might seem like a silly question. After all, recently, New-Era stocks have clearly rolled over and fallen out of favor. Stronger economic growth (fueled by policy stimulus and reopenings) certainly benefits investments that are more sensitive to improved economic-recovery speed. This includes small caps, cyclical sectors, value stocks, and international equities.
Inflation fears have justifiably ratcheted higher in recent weeks. The expected inflation rate embedded in the bond market (i.e., the 10-year breakeven rate) surged off a low last March to more than 1% above the 10-year Treasury yield. Industrial commodity prices have reached their highest levels since 2011, and the price of crude oil—tripling from year-ago levels—is now higher than before the pandemic.