Week 24/09 – 01/10
Last week there was a significant flow of news that can help inform us about the inflation outlook, monetary policy and the course of financial markets.
Inflation expectations data (survey of expected inflation over the next year) held at a series high of 4.8% for the US, after a substantial jump last month; while inflation expectations for the next three years rose to the highest level since August 2013.
The United States Senate has passed a new $1 trillion infrastructure bill, which includes $550 billion in new funding for transportation, broadband, and utilities. In addition, the Senate took an important step by passing a larger $3.5 trillion spending plan that Democrats hope to pass (albeit without help from Republicans) in the coming months. A fiscal stimulus of this magnitude that will affect the economy in 2021-2022 will support growth, but it will also be inflationary.
The latest published jobs report showed the US economy added 943,000 jobs in July, far more than the 845,000 economists had expected. The unemployment rate fell to 5.4% (below estimates for 5.7%), while, at the end of June, the number of jobs increased by 590,000 to an all-time high of 10.1 million. . Employment data is an important variable to watch, as politicians and central bankers are united in their focus on the labor market as the leading indicator for determining monetary policy.
All of the above is connected. Rising inflation and inflation expectations, fiscal stimulus that could further boost inflation, and strong US jobs data all point to monetary policy turning less accommodative sooner rather than later. That's important because monetary policy support has been very important to financial markets in the recovery from the COVID-induced volatility of 2020.
The good news for investors is that this is happening in an environment of strong positive economic growth. However, investors should be aware of the potential for increased volatility and divergent performance. Tighter monetary policy and eventually higher interest rates, buoyed by a strong economy, are good for most; but not for all stock valuations. “Hype” stocks with their valuable valuations, found across multiple sectors (Tesla, bitcoin, et al.), could be the likely victims.
Stock selection and a focus on buying quality, growing businesses, at reasonable valuations has been a good strategy in the past and will continue to be in the future, especially in a future of higher inflation and tighter monetary policy. .
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI. Copyright © 2022 Dominion Capital Strategies, All rights reserved
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