What You Need to Know
- Rising inflation and yields are signs of a normalizing economy.
- Recent economic stimulus has fueled the recovery in a stunning way, particularly with productivity.
- Value stocks are preferred right now, but watch for secular technology firms with revenue growth opportunities.
The U.S. has made significant strides against COVID-19. Success combating the virus, combined with the massive stimulus delivered in the past several months, has served to reignite economic activity across multiple sectors of the economy. About 36% of Americans are now fully vaccinated, and this number will continue to rise now that children ages 12-15 have been cleared to start receiving the vaccine.
Rising inflation and yields are signs of a normalizing economy. In April, the core consumer price index (CPI), which excludes volatile food and energy prices, exceeded industry estimates. It increased 3% on an annualized basis, and ticked up 0.9% versus March, compared with predictions for 2.3% and 0.3%, respectively. Bond yields continue to reflect concern about inflation, but with the U.S. 10-year yield hovering at 1.60%, it could be much higher.
Although higher inflation has spooked investors, it is, in my view, simply a sign that the United States — flush with liquidity from fiscal and monetary stimulus — has started to reopen faster than many anticipated. As economic activity, including consumer spending, starts to hum, inflation rises.
In my large-cap core portfolio, I remain focused on economically sensitive stocks that will benefit from the recovery. I’m skewing toward value names that have increased productivity through lean operations, as well as toward companies with the ability to raise prices to address the higher cost of materials.
Accelerating Economic Activity
Since last year, we’ve been talking about how the stimulus will fuel recovery, and we’re now seeing this come to fruition in a stunning way — particularly with productivity growth. In the first quarter, U.S. GDP grew by 6.4% on an annualized basis, reflecting the continued economic recovery, business reopenings and impact of policies such as direct payments to consumers, expanded unemployment benefits and Paycheck Protection Program loans.
Household income also rose, as did consumer confidence. U.S. personal income rose at a record pace of 21.1% in March, for the largest monthly increase since record-keeping began in 1959. In April, the Conference Board Consumer Confidence Index rose sharply to 121.7, from 109.0 in March.
I expect spending to accelerate in the coming months due to record household savings and more reopenings. Flush with liquidity, consumers have begun expanding their purchases to services as well as goods. Though April, retail sales were flat following a 10.7% surge in March attributable to stimulus checks.
Consumer savings are still quite high: In March, the rate stood at 27.6%. Compare this with a historical rate during “normal” times of just 5%, and you have the recipe for robust spending moving forward.
All this activity is fundamentally inflationary. While core CPI exceeded expectations in April, so did the overall CPI, which rose 4.2% from a year earlier, compared with expectations of a 3.6% increase. Overall, April CPI gained 0.8% versus March, against the expected 0.2%.