Mid-Quarter Update: What Does Transitory Mean?September 02, 2021
In this Mid-Quarter Update, we discuss our analysis on the following topics:
-Recent readings on consumer confidence have rolled over. The surveys are validated by the stagnation in real consumer spending in the last few months.
-In conjunction with the slowdown in house sales and durable goods orders, measures of current quarter GDP and full year 2021 GDP are dropping. Inventories are supposed to account for 3.52% out of 5.05% according to the Atlanta Fed GDPNow forecasts. Given the still snarled supply chains, this may be wishful thinking.
-The Valueline Geometric Index, an equal weighted index of almost 1,800 companies, has gone sideways since May as the Bloomberg GDP estimate for 2021 peaked. Now that GDP expectations are fading, will stocks?
-Recent economic data in the US and around the world has surprised on the downside for the last several months, while inflation continues to surprise on the high side.
-We are told that inflation is transitory, but does that mean that stock price and house price inflation is transitory too?
-Is the era of digital deflation over as semiconductor prices are now increasing in price rather than falling?
-We find the real earnings yield for the US equity market to be rather unappealing right now, though small caps are trading at a 20-year discount to large cap stocks, and value stocks offer a greater margin of safety than growth. In particular, financials appear cheap to us while technology appears expensive across the cap-size spectrum.
-Japan seems to us to offer a unique opportunity in the equity markets right now. It offers a real earnings yield about 3x the S&P 500 and the Japanese Yen is about 40% undervalued on a purchasing power parity basis.
-Fixed income opportunities seem unappealing to us as well. We think holding a good allocation to short duration US Treasuries and cash makes sense as we wait for a more attractive entry spot in broader equity markets.
Download the full PDF with charts here: What Does Transitory Mean?
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