Here's a question. What happens to stock prices when inflation gets underway?
Here's an answer. Or at least part of the answer as it helps explain the stock market of the past few months:
Early on in a period of inflation, corporate profits will increase because inventory costs may reflect pre-inflation prices – but wages will not increase right away.
That should really read "wages and another costs will not increase right away", but you get the idea.
To the extent that stock prices reflect expectations of the future, the runup in stock prices in 2021 can be said to owe much to expectations of rising corporate profits from rising prices. That situation can last until inventories fully turn over and businesses have to pay higher costs when they replenish them. Once they arrive, higher costs put a cap on the rate at which businesses can grow the profits they book.
That's relevant today because higher costs have begun arriving for businesses.
Though producer prices are now rapidly rising, their effect is far from uniform in affecting all companies across the U.S. stock market. It is however becoming widespread enough to affect future expectations out where we can reliably project them. The dividend futures-based model we use to project the future for the S&P 500 (Index: SPX) indicates the early-inflationary period where expectations of rising profits from rising prices can boost stock prices have perhaps a couple of more months to run. After that, betting on higher inflation by buying stocks looks to be a less rewarding proposition.
Other things happened in the last week to move the market, but as you'll see in our selection of market-moving headlines for the past week, the undeniable arrival of inflation is by far the biggest market-moving story:
- Monday, 5 April 2021
- Signs and portents for the U.S. economy:
- U.S. money market funds see heavy inflows for second week: Lipper
- U.S. factory orders decline in February
- U.S. services sector gauge scales record high; cost pressures mounting
- Biden says no evidence higher corporate taxes will drive companies abroad
- U.S. bankruptcies increased in March in sign backlog may be clearing: Epiq AACER
- Fed minion says ready to sit on hands:
- Strong economic data lifts Dow, S&P 500 to record closes
- Tuesday, 6 April 2021
- Daily signs and portents for the U.S. economy:
- Oil gains 1% on strong U.S., China economic data
- U.S. job openings jump to two-year high in boost to labor market
- Fast food struggles to hire as demand soars, U.S. economy roars
- California plans to fully reopen economy on June 15
- U.S. President not talking to Fed minion:
- Signs of longer lasting trouble in Japan:
- Positive recovery signs in Eurozone, China:
- Business among German carmakers picks up speed in March: Ifo
- Euro zone unemployment unchanged in February
- China's services sector recovery accelerates in March
- S&P 500 slips but closes near record level
- Wednesday, 7 April 2021
- Signs and portents for the U.S. economy:
- Fed minions say US economy needs to be propped up by Fed but will take away punch bowl when things improve; the Fed doesn't need to do more than it's doing; to expect high inflation; and that the Fed's balance sheet can keep growing:
- Fed expects to keep supporting economy 'for some time,' minutes show
- Fed's Kaplan says U.S. economy still needs central bank support: WSJ
- Fed's Evans says policy to stay on hold 'for some time'
- Fed's Evans sees 'uncomfortable' months of higher inflation ahead
- Fed's balance sheet size is far from hitting any constraints: Daly
- Positive recovery signs in trade bellweather Singapore, Eurozone:
- Singapore economic contraction seen easing in first quarter, central bank on hold: Reuters poll
- Euro zone business activity expanded in March despite lockdowns
- BOJ minions invent new stimulus; ECB minions crank up money printing presses:
- Analysis: Even as it tapers, BOJ invents new weapon to stimulate growth
- ECB speeds up money printing in March, focuses on Germany
- S&P closes slightly higher after Fed minutes feed stable rate view
- Thursday, 8 April 2021
- Signs and portents for the U.S. economy:
- U.S. weekly jobless claims rise again, but labor market recovery gaining steam
- Oil flat as weaker dollar offsets surge in U.S. gasoline stocks
- Fed minions paying attention to infections, not inflation, and definitely not thinking about their career path:
- Fed policymakers see risk from infections, not inflation
- Powell says he is not focused on possible second term as Fed chair
- Bigger inflation arrives in Eurozone, signs of recovery in Germany:
- Euro zone producer price growth accelerates in February
- Strong domestic demand propels German industrial orders
- ECB minions hoping they can stop propping up Eurozone:
- ECB sees scope for cutting bonds buys after second-quarter surge
- ECB's Lagarde sees receding growth risk beyond short term
- S&P closes at record on tech boost as U.S. Treasury yields retreat
- Friday, 9 April 2021
- Daily signs and portents for the U.S. economy:
- Oil edges lower on mixed supply and demand outlook
- Seven takeaways from Biden's budget proposal: defense, immigration, climate
- U.S. producer inflation heats up in March as prices increase broadly
- Fed minions say will act to contain inflation, but maybe not until 2022:
- Kaplan says he wants Fed to avoid being 'late' on tapering
- Fed's Clarida: Higher inflation continuing into 2022 would be relevant for policy
- It's not just the U.S. as bigger inflation breaking out all over:
- Brazil March inflation 6.1%, highest since 2016
- China factory gate prices rise by most in nearly 3 years as economic recovery quickens
- Post-coronavirus recession recovery in China:
- German exports rise in February, lifted by China trade
- China's auto sales surge 75% in March, 12th straight monthly gain
- S&P 500, Dow climb for third day and close at records
Lurking elsewhere, Barry Ritholtz spelled out all the positives and negatives he found in the past week's markets and economics news.
Labels: chaos, inflation, SP 500
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