Watching the Inflation Curve

US stock and bond market performances were relatively flat for the month of May. While it may seem like it was a quiet month in the aggregate, there were a few moments of volatility throughout the period.

In mid-May, the US Consumer Price Index for April rose by its fastest rate since 2008, jumping 4.2%, a sharply higher move that temporarily spooked markets and investors broadly.

Our Perspective

For the first time in a long time, investors are seriously beginning to fear how a sustained inflation increase might impact the economy and global financial markets.

Since the pandemic first hit last year, policymakers at both the fiscal and monetary levels have been adopting aggressively pro-growth policies, hoping to stimulate the economy enough to get through the crisis. As the pandemic eases in some areas, including the US, their willingness to keep those polices in place has led to growing fears that it may cause the economy to overheat, jumpstarting inflation.

One hot reading does not make a trend, but this is an issue to watch. The debate over whether the inflation we have seen thus far will be sustained, or whether it will be merely transitory, is unclear to us. In general, we believe it is likely that inflation will be higher going forward than in the recent past.

Infrastructure and Spending

President Biden continued his spending push last month, working with Senate Republicans to push a bipartisan infrastructure proposal that’s designed to tackle a very wide array of needs. These include the usual funding for roads, bridges, and highways, as well as spending for re-shoring manufacturing, technology and broadband access, climate change, and affordable housing.

Our Perspective

Going together with the rising inflation fears are mounting investor concerns over how much and how necessary additional fiscal stimulus is, particularly at a time when the economy has clearly turned the corner and is accelerating.

Republicans are pointing to the prospects of higher taxes and rising inflation levels as reasons for a ‘less is more’ approach, and they have recently proposed a significantly scaled down counteroffer. It remains to be seen if the President will be able to broach a bipartisan compromise.

Despite Congressional resistance, the large-scale spending proposals appear to be resonating. In recent polls, nearly two out of three Americans support the proposals.

Regardless of how investor palatable these big spending initiatives are, it is likely we will continue to see more of them in the months and years ahead.

For more, check out our recent blog post, Infrastructure, Spending, and Growth. .

3 Opportunities Across Sectors and Styles

Stock market styles (i.e., growth versus value) have been a key market driver this year as growing economic momentum perpetrates a shift from technology-oriented type business toward economic-sensitive cyclical type companies.

Our Perspective

We do not subscribe to the notion that investors should necessarily be all-in on growth or all-in on value. Our investment philosophies value flexibility, and the ability to deliver on client objectives in all market environments.

Part of that means being willing to own both growth- and value-type businesses if the opportunity looks right. This year has been no exception. We recently highlighted three different stocks and/or industries that we like today, and readers may notice that the areas extend across both growth and value.

For more, check out our recent blog post, 3 Opportunities Across Sectors and Styles. .

Our View
Economic Cycle		Vaccines, economic re-openings, and fiscal stimulus has dramatically reaccelerated the pace of the recovery, substantially boosting economic activity and business/consumer confidence
Stock Market		The US stock market is well past pre-pandemic levels and at all-time highs; valuations are broadly elevated, which, alongside rising interest rates and inflation, pose significant risks
Bond Market		While still depressed by historical standards, interest rates are at post-pandemic highs; corporate and municipal bond credit spreads have significantly tightened, and in some cases, are depressed beyond pre-pandemic levels
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: we believe the worst of the crisis is behind us, and the US appears to be finally on track for a once and for all economic re-opening, driven by vaccine efficacy and distribution
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is further along in its economic recovery and its credit cycle appears to have peaked, potentially creating a capital markets headwind ahead
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks may lead to some transitory inflation issues near-term

Indicates change

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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