U.S. Stocks, Jobs & Inflation

Inflation Came In Strong in April While Companies Have A Hard Time Finding Workers

We remain cautious on U.S.-listed technology stocks and have only invested in the ones that offer a compelling risk / reward. Our view is that most U.S. technology stocks are still trading above historical averages and could experience a weaker environment as COVID-restrictions fade. Finally, these are often unprofitable and could thus suffer more in case interest rates were set to rise earlier than expected.

• Our goal is to maximise our upside while minimising our downside
• U.S.-listed technology stocks only offer a weak risk / reward for now. We are therefore keeping these on our watchlist

What Is Happening?

Inflation sped up in April and exceeded expectations as consumers prices increased by 4.2% while economists expected a more moderate 3.6% gain. These numbers suggest that inflation is not limited to the expected base effects. These caused further turmoil on markets.

• The Nasdaq traded around 8% below its April 29 all-time high while the S&P 500 retreated 4%
• Despite positing strong earnings results, high-growth technology stocks continued their descent as valuations remain stretched

Looking Past: Jobs, Jobs, Jobs

We believe that the Friday jobs report hid an ugly truth: employment lost during the pandemic may take months (or even years) to come back.

• This will constrain the labour supply and lead to higher wages. This in turn might might transform the “transitory” wage inflation into a stickier one and may require the FED to intervene earlier than excepted
• Such a situation may create an extremely weak environment for stocks with stretched multiples and no earnings
• Despite their apparent low valuations, we believe that a number of technology stocks are still trading above their historical averages and may be prime suspects for additional corrections, certainly as the pandemic-boost most of these enjoyed fades away

Looking Forward: More Inflation

Now the National Retail Federation point towards record U.S. retail sales growth in the 6.5% to 8.2% range as the vaccine roll-out, stimulus packages and record savings rates push customers to shops.

• The Wall Street Journal reported that credit card debt reached a low of $ 749B in March 2021, down for $ 913B a year earlier as borrowers were able to pay down their credit card debt payments while their mortgage and student loans payments were paused
• With lockdowns and nowhere to spend their cash, the U.S. Personal Saving Rate stood firmly above the 12.5% mark during the whole pandemic (with a peak in April at 33.7%) while it hoovered in the 7 to 8% range in the years before the pandemic

Going forward, we expect inflation worries to continue pressuring stocks. These will be supported by pent up consumer demand as saving rates reached new heights and indebtedness levels decreased.

BENCHMARK'S TAKE

Inflation sped up in April and exceeded expectations as consumers prices increased by 4.2% while economists expected a more moderate 3.6% gain. These numbers suggest that inflation is not limited to the expected base effects. These caused further turmoil on markets and future inflation readings may not calm markets

• Current price action validates our assessment that most tech stocks are trading near the top of their range and may need a strong, external catalyst to push higher
• Going forward, we expect inflation worries to continue pressuring stocks. These will be supported by pent up consumer demand as saving rates reached new heights and indebtedness levels decreased
• We believe that the Friday jobs report hid an ugly truth: employment lost during the pandemic may take months (or even years) to come back
• This may create a supply shock that will further increase prices, certainly in the face of rising consumer spending. Prompting the FED to act earlier than expected
• We remain cautious on U.S.-listed technology stocks and have only invested in the ones that offer a compelling risk / reward. Our view is that most U.S. technology stocks are still trading above historical averages and could experience a weaker environment as COVID-restrictions fade

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Nik Shuliahin on Unsplash.