Everyday prices are soaring — so why are stocks still flying high?

Asia's Tech News Daily

Main Street may be digging deeper into its pockets, but Wall Street is buoyant.

Americans know their day-to-day expenses are rising: Costs for grocery staples have been on an upward march for months, gas prices have gone up 20 cents in a month and more than $1.20 from a year ago and numerous government inflation benchmarks are hitting levels not seen in years, or even in decades.

Some prominent economic voices have weighed in lately with their concerns. Twitter co-founder Jack Dorsey issued a gloomy prediction recently: “Hyperinflation is going to change everything. It’s happening,” he tweeted Friday night.

Former Clinton Treasury Secretary and White House adviser Larry Summers was less terse but more pointed in his criticisms: “We’re in more danger than we’ve been during my career of losing control of inflation in the U.S.,” he said at a virtual conference earlier this month, lambasting what he characterized as “a generation of central bankers who are defining themselves by their wokeness” in Western economies.

There’s certainly a line where consumers say, ‘no more.’

Both Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have said recently that they expect inflation to linger longer than might have been assumed a few months earlier. In a CNN interview on Sunday, Yellen said inflation will likely remain higher than optimal until the second half of 2022. She specifically rebutted Summers’ warning, saying, “It’s something that’s obviously a concern and worrying them, but we haven’t lost control.”

At a virtual conference on Friday, Powell said that “longer and more-persistent bottlenecks” in the supply chain are creating more serious choke points than policymakers had anticipated, prompting them to consider a wider array of economic outcomes.

While shoppers might fret, though, investors appear unfazed. Inflation warnings aside, the stock market has continued on an upward trajectory. Both the Dow Jones Industrial Average and the S&P 500 hit record highs last week, and resumed their upward march on Monday. Main Street may be digging deeper into its pockets, but Wall Street is buoyant.

“The market is probably saying it’s probably not as dire as the more extreme calls from pundits or policymakers,” said Ross Mayfield, an investment strategy analyst at Baird. “A lot of inflation metrics are elevated but they’re not signaling hyperinflation, for sure,” he said.

“Hyperinflation like in the 1970s is problematic… This is a lot different from the 70s, when high levels of inflation were matched with slowing growth and high unemployment — that’s a problem,” said Sean Bandazian, an investment analyst at Cornerstone Wealth. “We have temporary supply issues — and still a ton of demand — and we have 10 million job openings. We don’t necessarily see a 1970s inflation and economic regime coming.”

Some market observers attribute rising equities to the long duration of the current low-interest-rate environment, which they say is driving investors to seek returns in stocks rather than low-yielding bonds. “They’re taking money out of fixed income and putting it into riskier assets. That’s what we’re seeing happening behind the scenes,” said Darren Schuringa, CEO of ASYMmetric ETFs. “Investors have nowhere else to turn.”

“What would be most problematic for the stock market is a hyperinflationary type of regime where the Fed has to act fast to raise interest rates [but] elevated inflation isn’t necessarily a death wish for stocks as a whole. In fact, deflation is typically worse,” Bandazian said. Sectors like energy and financial services, he added, often benefit when inflation runs a little hotter.

Investment pros said that despite the sticker shock Americans might be feeling at the gas pump or the supermarket meat counter, the combination of rising wages, an elevated savings rate and lower revolving debt levels have served as a buffer against the most painful impacts of rising prices. “People have saved a lot of money,” Schuringa said. “The consumer isn’t the problem… “Individual balance sheets aren’t in bad shape, nor are corporate balance sheets in really bad shape.”

And the tight labor market has been driving wages higher, especially at the lower end of the income spectrum.

“One of the things that’s followed headline inflation higher is wages,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “On the one hand, yes, we’re seeing concerns about headline inflation, but consumers still have ample room to maintain or increase spending,” he said.

As a result, corporate earnings have largely held up, some even to a greater degree than expected — and markets love an upside surprise. “You’re seeing good Q3 earnings… margins really haven’t been impacted to the degree many people were expecting, with wage increases and costs of goods increasing,” said Dustin Thackeray, partner and chief investment officer at Crewe Advisors.

Companies have been able to keep their profits up by passing cost increases along to customers. The question is to what extent they can continue to raise prices without seeing sales drop. “At some point, that may backfire on companies if they’re too aggressive,” Thackeray said. “There’s certainly a line where consumers say, ‘no more.’ ”

“They really believe they have pricing power at this point. They’re able to raise prices without damaging their unit sales growth,” Haworth said. “If we did see consumer spending falter… that would damage earnings growth,” and that would dampen investors’ current enthusiasm.

The trajectory of the pandemic also remains a wild card. Experts say that the coronavirus, although better controlled now compared to a year ago, could yet throw a wrench into the economy — precisely because it is no longer front and center.

“I think a major Covid shock on a global basis that causes economies to shut down would cause another correction in the market, because that’s not baked in any longer,” Schuringa said. “A spike in Covid, especially with vaccinations — I think that would take the markets down,” he said.

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