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Monday, October 11, 2021
Funny (or sad, depending on how you look at it) short story from this past week that will inspire you to (hopefully) scrutinize your portfolio as we head into 2022.
I enjoy grocery shopping, really ever since I raised hell down the canned-goods aisles with my mom as a kid. The thrill of finding that perfect looking steak or fish — or lemon — is somewhat therapeutic. A true moment of relaxation away from the addictive hue of the iPhone and in my world, the alluring laptop.
Last week, while on a 10-minute break around 7:00 p.m. ET I picked up a slab of heaven from the butcher inside the local supermarket (no, not from “Whole Paycheck”): a two-inch thick ribeye steak. Yum. I put the steak in my basket, didn’t think too much about it seeing as I buy the same cut of steak once a week. The cashier rings up the steak and I almost fall on the floor: $45. Too late to put the steak back, I didn’t want to be that person in line.
After I paid, I went back into the store and took a look around at the prices for “stuff” as if I was still a stock analyst doing channel checks. Down each aisle it was like I was being hit in the head by little dancing sticker prices, each seemingly 35% higher than a week earlier. All of these little dancing sticker prices were laughing at me, of course.
In light of this expedition (a bizarre one at that), I can confidently share with you this dose of wisdom to kick off the week. Inflation ain’t goin’ nowhere baby. In fact, you are about to be smacked in the head with laughing sticker prices for food, gas, heating oil, jeans, Red Bull and maybe even clean air if you haven’t already been.
All year the Federal Reserve has shoved down Mr. Market’s throat that inflation is transitory. I would encourage all of these government workers in their gilded offices to spend a week touring grocery stores and maybe do some real on the ground work because they have set investors up to fail.
Oil prices are at seven-year highs. Natural gas prices have nearly doubled in six months. Gas prices along the West Coast are north of $4 a gallon, according to AAA. Cotton prices are up 25% since Sept. 20 (stat complements of NYSE analyst Michael Reinking).
Having digested this impressive deep dive into the shipping crisis by Yahoo Finance editor-in-chief Andy Serwer — and my latest shopping trip — it’s clear all sorts of price inflation will be here to stay. In other words, this notion of inflation being transitory is a cruel sick joke by a Fed trying to cover their own rear-ends.
Should one not be inclined to embrace the stats above, then take a gander at what top executives recently told me about inflation on Yahoo Finance Live:
“The reality is everything has got some inflation. I agree with your point that it [inflation] doesn’t feel very transitory at the moment. The reality is we came off the pandemic, where basically most of the industrial economy and the consumer economy shut down and now the demand has snapped back much faster than pretty much everybody has predicted.” — Dow CFO Howard Ungerleider. He added he is “working to raise prices” to compensate for higher costs.
“We have been able to lock in the price of cotton for the first half of next year at very, very low single-digit [percentage] inflation. We are negotiating for the second half [of 2022] and we think we can offset inflationary prices.” — Levi Strauss CFO Harmit Singh
“There is really no company that is immune to what has been happening in terms of commodity as well as operation expense inflation. Everyone’s prices are up a little bit in a world where prices are increasing.” —PepsiCo CFO Hugh Johnston
Inflation is appearing so sticky that “stagflation” — a slowing economic growth backdrop and high levels of inflation — has become the topic du jour among clients at Goldman Sachs.
“Stagflation was the most common word in client conversations this week as equity market volatility remained elevated,” said David Kostin, Goldman Sachs U.S. equity strategist.
Markets have historically hated stagflation, per Goldman’s research.
“During the last 60 years, the S&P 500 has generated a median real total return of +2.5% per quarter, but that quarterly return fell to -2.1% in stagflationary environments, worse than the median returns in environments characterized solely by weak economic growth or high inflation,” Kostin added.
So what’s the play for investors in a world where inflation isn’t going anywhere anytime soon? Well, it could be multi-faceted, depending on your level of investing expertise. Here’s what several market veterans told me on how to invest amid pesky inflation:
“As cost inflation accelerates, we recommend dividend growth stocks that benefit from inflation. We also like small caps, which are more tethered to U.S. GDP, benefit more from capex cycles (highly correlated with commodity inflation) and trade at a historical discount vs. large caps. The equity market offers far more attractive inflation-protected yield than TIPS [Treasury Inflation Protected Securities].” — Savita Subramanian, Bank of America equity and quant strategist
“From a sector perspective, higher energy prices are often associated with rising inflation, and we are currently overweight the energy sector which is a beneficiary of higher oil prices. Also, if there is inflation, that is typically associated with higher rates, which would benefit financials; we are also overweight. We are also overweight REITs — the index is a diverse mix of industries, but given we are seeing a rise in rents and a shortage of supply in housing and areas such as cell towers have pricing power, this is another area that should benefit. Outside of sectors, commodities in general should be a beneficiary of supply disruptions — and the Bloomberg commodity index just hit a cycle high. Within a portfolio context, you would generally want to be underweight fixed income in a rising rate inflation environment. Within fixed income, investors would want to be short duration and generally overweight areas such as leveraged loans, which would provide a hedge against the Fed tightening policy quicker than current market expectations to deal with inflations, and TIPS which are indexed to inflation.” — Keith Lerner, Truist Wealth co-chief investment officer/chief market strategist
“From a market standpoint it’s banks and materials/resources. Banks benefit from rising rates. Resource stocks (miners, energy companies, agricultural companies) benefit from rising commodity prices. Mix in commodity exposure but not too much. Just some as it’s volatile (and most investors should just use ETFs). More broadly, go value over growth. In the fixed income realm look for floating rate debt or short duration. Bank loans or senior secured debt that reprices frequently will outperform as rates rise. Finally, watch for the exits. At some point the Fed will kill inflation and markets will drop. But we’re likely years from that now.” — Tom Essaye, Sevens Report Research founder
Now go forth and slay the inflationary beast coming for your portfolio. As for me, I am off to find a cheaper cut of steak or to open a crypto trading account so I can afford the ribeye I have been eating for the past 20 years.
Odds and ends
Bank earnings: Speaking of things rising in price, bank stocks have been on fire into earnings this week, from JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley (preview here from Yahoo Finance’s Emily McCormick). The KBW Bank Index is up a cool 40% on the year (Wells Fargo up the most among the big banks, go figure, +59%) as traders bet on rising rates (positive for bank margins) in 2022 and a supportive economy for loan growth. Since the Fed’s last policy decision on Sept. 22 — where it signaled a bond tapering plan was nearing — the KBW Bank Index has added 6.5%. I would say the backdrop for bank stocks is ripe for a sell the news event — bank profit margins could disappoint elevated expectations due to rising costs for talent, among other inflationary expense lines. A couple items to be on the lookout for in these reports: 1) trading revenue in light of the pickup in activity late in the quarter in stocks and bonds; 2) debit and credit card spending by customers inside a slowing growth environment; 3) hints of new year-end expense cutting programs to counteract inflationary costs; 4) efforts on the crypto front.
Hasbro: I send my best wishes to Hasbro CEO Brian Goldner. Hasbro disclosed yesterday its long-time CEO will take a medical leave of absence to focus on his health. Goldner disclosed in August 2020 that he was undergoing ongoing medical care following treatment for cancer in 2014. Full transparency, Goldner gave me one of my first “CEO interviews” when I was starting out in this crazy news business. He has led the public company for 13-plus years. I wish him a speedy full recovery.
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