by Bryan Perry

April 27, 2021

This past week, the financial media was ripe with one guru after another calling for the market to correct to the tune of anywhere from 5% to 20%, citing “peak earnings” comparisons, rising inflation data, and the inevitability of the Fed having to walk back their stance of “no rate hikes until at least 2023.”

To the naysayers’ credit, recent economic data would suggest that the upcoming inflation data will confirm what worries the market most – some sudden spikes that may rattle the bond market.

The preferred inflation metric by the Federal Reserve is the change in the core personal consumption expenditures (PCE). This index is based on a dynamic consumption basket and will be reported this Friday after the Fed’s two-day FOMC meeting. And though the trend for PCE data is grinding higher, per the chart below, the Fed continues to believe that the current rise in inflation is not long-lasting.

Personal Consumption Expenditures Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Personal Consumption Expenditures (PCE), the Fed’s favorite inflation metric, remains under 2%, year-over-year.

One observation about why the Fed is maintaining such a high level of conviction regarding fiscal policy is that the global reopening is not a synchronous economic event. China, the U.S., and parts of Europe are experiencing late-stage pandemic growth, but this is not happening in several key developing and emerging markets, where Covid-19 data is surging, and their economies are still suffering.

This is especially true in India, where daily cases for Covid are surging (see chart, below).

Daily Changes in Covid Cases in India Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The uneven recovery from the pandemic around the world is dampening the narrative that the entire globe would see synchronous growth that would stoke inflationary pressures to where central banks would have to taper QE much sooner than forecast. The Fed recognizes these imbalances, and that is why they are standing pat on their “transitory” inflation forecast that the market has bought into.

Last week’s bumpy ride in reaction to the Biden plan to raise capital gains taxes was not unexpected, but it simply gave traders and investors fodder to do some rebalancing. One has to respect that some of the best gains of late have come from consumer staples, healthcare, and utilities – hardly the stuff of rampant inflation expectations. But by Friday’s close, it looked like business as usual, where investors once again bought the dip in growth stocks and economically cyclical sectors.

There was also speculation that negotiations from power brokers inside Congress could reduce the top tax rate as well as some published observations about the market’s historical ability to weather tax increases.

More importantly, bond yields held firm all week amid continued large-scale Treasury auctions and seemingly hot economic data, further supported by new home sales soaring 20.7%, month-over-month in March, to a seasonally adjusted annual rate of 1.021 million (consensus expectation: 912,000). This was the highest annual rate of sales since August of 2006. The resilient nature of the market presumably rekindled a “fear of missing out” (FOMO) on further gains, and possibly short-covering activity.

Remarkably, U.S. Treasuries traded little changed for the third straight day despite strong new home sales. The 2-year yield increased one basis point to 0.15%, and the 10-year increased one bp to 1.57%. The U.S. Dollar Index declined 0.6% to 90.82. WTI crude futures settled 1.1% ($0.70) higher, to $62.15, after California Governor Newsom announced the state will stop issuing new fracking permits by 2024.

Four months into 2021, the market is enjoying the solid tailwinds of QE, stimulus, low rates, and upward earnings revisions. Here are the year-to-date (YTD) gains for four major indexes through April 23:

  • Russell 2000 +15.0% YTD
  • S&P 500 +11.3% YTD
  • Dow Jones Industrials +11.2% YTD
  • Nasdaq Composite  +8.8% YTD

Interestingly, but not surprisingly, REITs are trading well in the current market landscape. REITs outperformed all sectors last week, giving rise to the notion that adjusted inflation will tick higher, interest rates will remain fairly tame, more emphasis will be on returning to corporate office digs, mall foot traffic will rebound quickly, and strong job growth will result in solid upscale residential apartment occupancy.

Shares of the Real Estate Select Sector SPDR (XLRE) just hit a new all-time high last week!

Weekly Sector Performance Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A Brief Detour into Gold Mining Shares

Real estate had the longest green line last week (above)! But just in case the inflation genie rises out of the bottle and rears its ugly head, investors should take a hard look at the recent price action in the gold mining stocks. As Bitcoin (digital gold) has suffered a recent setback in its torrid climb, one of the most compelling charts to pop up on my screens is that of the VanEck Vectors Gold Miners ETF (GDX).

After peaking in early August 2020, you couldn’t give away gold mining stocks. They finally bottomed in the first week of March, followed by a quintessential double-bottom – a higher-low formation in April – a textbook handle, with a clean upside breakout that has broken what was a well-defined downtrend.

Historically, gold mining stocks have outperformed physical gold and thus GDX looks well positioned.

Gold Miners Vaneck Exchange Traded Fund Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Investors seeking a non-Bitcoin inflation and currency hedge might consider GDX in light of record federal deficit spending and record QE levels, resulting in devalued currencies. Then, consider the mining shares’ leveraged correlation to physical gold, and the fact that it is not a crowded trade by any means.

The old saying of “there is always a bull market somewhere” still holds true, and if the charts don’t lie, then there looks to be a new bull market in the gold mining sector shaping up.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Fed’s Bull Market Strategy

Sector Spotlight by Jason Bodner
Talk Isn’t Cheap – It’s Costly to Listen to Negative News

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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