What You Need to Know
- The bulk of inflation is wages, so it's not all transitory, and likely will continue to climb, Hightower's Stephanie Link says.
- The Fed signaled that it will raise interest rates in 2023, but data indicates the increase could come as early as mid-2022.
- Investors should respect the change in the market, trim a few winners and look for bargains.
As the U.S. economy continues to reopen and pick up steam, we have seen a notable rotation in the market. Late last year and into the second quarter, investors were favoring value stocks to gain exposure to economically sensitive sectors. In the last couple of weeks, however, we have witnessed massive movements under the surface of the market, back to growth.
As we head into the second half of the year, Federal Reserve Chairman Jerome Powell is taking a balanced tone when it comes to inflation. As the economy strengthens, the Fed now sees inflation hitting 3.4% this year, significantly above its previous target of 2.4%. The Fed has insinuated that inflation is transitory, but in my view, since the bulk of inflation is wages, it is not all transitory and will continue to climb. I expect a tapering announcement at the August Jackson Hole Fed meeting, or in the fall.
The Fed also signaled that it expects to raise interest rates in 2023, but based on the data we’re seeing, that increase could come as early as mid-2022.
Inflation Is Creeping Up, Particularly Wages
We’ve seen several economic indicators to support this, including the recent Philly Fed Manufacturing Prices Paid Index, which hit a level not seen since 1979 — currently 80.70, up from 76.80 last month and up from 11.10 one year ago. Other signs of inflation rising faster than expected are the U.S. consumer price index, which rose 5% year-over-year, the fastest pace since August 2008, and the producer price index, up 6.6% year-over-year and the largest annual increase on record.
Employment, meanwhile, continues to recover. The May non-farm payroll number was up, increasing by 559,000; the unemployment rate fell to 5.8% from 6.1%. Notably, the wage inflation indicator in the report showed that in 11 of the last 12 months, average hourly earnings have risen, according to a Marion Capital analysis of Bureau of Labor Statistics data.
The Job Openings and Labor Turnover Survey (JOLTS), which tracks data on job openings, hires and separations, showed that job openings hit a record 9.3 million in April. With many enterprises struggling to attract staff, we will likely continue to see upward pressure on wages to fill those job openings.
With above-trendline growth, I see inflation being persistent. The Fed will methodically and purposefully address this by slowing its bond purchases, and this tapering will keep markets calm ahead of a likely rate increase.
Market Rotation Underway: Adjusting Portfolios
With consumers venturing out and resuming their demand for services, the Institute for Supply Management Services PMI registered 64% in May — a 1.3-percentage point increase versus the April number of 62.7% — with year-on-year growth for the 12th consecutive month.