Of all the data spewing forth none are watched more closely than the ones related to employment and inflation. All of which is fodder for the two major political / financial arguments: 1) Inflation is transitory and manageable and 2) Inflation is about to run amok and destroy the economy.

Fed Head Powell is sticking to his guns with the idea of a transitory inflation spike being on the cards; in other words, the kind that needs no intervention. If you are in agreement with Jerry, you have some of the data on your side — and some friends in high places too. If you disagree with him, well, there are a lot of people on that side too.

The big investment houses pay staggeringly high salaries to those who are placed at the helms of these huge institutions – with the expectations of them making the right choices: the ones that can make, or lose, fortunes.

Since there is such division on the sentiment surrounding the question of inflation, we thought it worthwhile to take a sample of what the ‘best and brightest’ are thinking. What follows is a bit of what we found.

Goldman Sachs is cutting its 2021 expectations for the 10-year Treasury yield this week, now calling for a rise to 1.6%, down from 1.9%. “In looking ahead, we expect erosion of labor market slack should continue to translate primarily to higher real yields, which we expect to be the main driver in taking yields towards our revised year-end target,” Goldman said they think inflation may be (on average) held to close to the Fed target of 2% — after a few months of spike. So, put them in the ‘It’s transitory’ camp.

Wednesday’s July CPI numbers showed a cooler-than-expected core rise and moderate price gains in hot sectors, but a headline number still well above 5%. “Inflation has, at a minimum, paused,” Brad McMillan, chief investment officer at Commonwealth Financial Network, told CNBC. “For both the headline and core figures, the monthly and annual numbers were stable or down from last month. Based on that data, inflation is certainly not on an unstoppable increase.” So, add them to the Transitory guys.

Could well be right — already we have seen the big spike in lumber go through a sizeable correction. Other building materials have followed suit, as have used car prices, rental car fees and a smattering of commodities.

But, remember the Official Two-Handed DSWP economist, who pipes up with the contrarian view: Rick Reider reports from BlackRock that they see an elevated risk for inflation, at least in the near-term. Joining BlackRock is one of the more extreme views; from David Kelly at J.P. Morgan Asset Management. He admits their firm is “…too obsessed with second derivatives.” and they “…still have a five handle on inflation.” (The ‘five handle’ reference is market lingo meaning they see inflation to be in the range of percentage numbers that have a 5 as the first number left of the decimal point. In other words, 5.0 – 5.999%).

Boiling this all down brings us to a point similar to asking the meteorologist whose forecast was 50% chance of rain. Asked for a better answer to the simple question of ‘Is it going to rain’, the highly trained professional with millions of dollars in equipment replied “Maybe it will. Maybe it won’t.”

From our view, we have to factor in not only the actual factual pieces of the pie that will either push inflation forward or allow it to subside; we also have to realize that some portion of inflation can always be credited to a principle of self-fulfilling prophecy. It works like this: If purchasing managers convince themselves that inflation IS around the corner they may respond by a) accepting the need for paying higher prices to their suppliers today and b) they may enhance their current order by buying more today to postpone paying even higher future prices. That’s a dangerous game so we would hope that people who buy things will restrain from paying tomorrow’s prices today. (Some quotes courtesy of SeekingAlpha.com)

Ron’s Market Minute –Update on Market Breadth

Last week I mentioned that market breadth has been somewhat shaky. This week I’m pleased to continue that thought with an update, and a chart that points out a potential broadening of market breadth. To refresh your memory, when market breadth is considered weak, the market returns are driven by a handful of large companies. On the other hand, when returns are spread more evenly over all stocks in the market, breadth is considered to be strong. Have a look at the chart of the past 6 weeks.  Pay attention to the bottom chart first. The ‘market’ return of the SPY (an exchange traded fund that represents the market action of the entire S&P 500 Index* stocks are weighted by market size) is shown in green. This market has been driven since about the beginning of June by a handful of very large companies. Then compare with the RSP (an exchange traded fund that weights all the stocks of the S&P Index* equally. When SPY is leading the market has less breadth, when RSP is leading the market has more breadth, or is considered to be a stronger market. 

Chart courtesy of Fastrack

Before June markets had more breadth. But now note that after 7/19/21 the strength of the RSP has turned up, or in other words the overall market is performing better when all (mostly all) stocks are participating when compared with the SPY in which the handful of really big companies are carrying the load. 

We’re looking for and hoping to see the breadth of the market get stronger as stocks that are NOT just the monsters are also performing well. That makes for a healthier market. Fingers crossed!

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-3716478-081321

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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Past performance is not a guarantee of future returns.