Although the market averages are not far from all-time highs, the market’s tone leaves something to be desired. In part this is due to the narrowing of market performance to a handful of the old mega-cap pandemic winners, as the recovery theme has paled before poor seasonals, the Delta variant, and the passing of peak growth off the pandemic lows.
But as we noted over the past few weeks, the march of the mega-caps has served to conceal a rotating correction underneath. Technicals reveal that the market, under the hood, has been weak for some time.
We do not believe that inflation will be transitory; we believe that falling bond yields reflect bond market technicals, mandated rebalancing by large institutional investors, and demand by foreign investors more than they reflect a correct prognosis of economic growth and inflation in the medium and longer terms. Not only that, but as Mohamed El-Erian, chief economic advisor of Allianz, recently observed, we are in an era in which many established correlations among macroeconomic variables are being disrupted – by confounding price signals created or abetted by the massive acquisition of bonds by central banks. Investors should be wary of drawing “if/then” conclusions on the basis of old wisdom in this era. Verify — by listening to earnings reports — and then trust.
We believe that many inflation beneficiaries, though they have fallen out of favor in the current period of volatility, will be able to move forward as the year progresses. Price is key, and as usual, we counsel investors to buy dips, which the market is graciously providing in various industries and companies even as the averages continue to head up with little apparent disruption.
Thanks for listening; we welcome your calls and questions.
