Positive Side Of Inflation, Exciting 2022

The Labor Department announced last week that the Producer Price Index (PPI) surged 0.8% in November. Excluding food, energy, and trade margins, the core PPI rose 0.7% in November so it is no longer just related to higher food and energy prices, suggesting that inflation is no longer “transitory.”

The positive side of this inflation is that the bull markets in residential real estate and stocks remain the best way to protect yourself against inflation, so growth stocks and dividend growth stocks are expected to remain an oasis for investors. Since the market began to recover after its initial decline in March 2020, millions of new investors have opened brokerage accounts as these investors increasingly are turning to stocks to protect themselves against the highest inflation rates we’ve seen in 39 years (since 1982).

The net result is that 2021 has been a great year for most markets, but fears still exist due to Elon Musk and other billionaires selling a record number of shares. The bears are insinuating that if “smart money” is selling, then a stock market correction must be imminent. However, The Wall Street Journal pointed out that in the third quarter, stock buy-backs rose to $234.5 billion, an all-time record. This may explain why companies continue to post better-than-expected earnings since stock buy-backs tend to boost the underlying earnings per share.

As far as a correction being “imminent,” we already had a 5% decline in the S&P 500 between Thanksgiving week and December 3^rd, when the stock market overreacted to the Covid-19 Omicron variant, as well as unnecessary fears of Fed tapering. NASDAQ fell almost 8% in the same time frame, then it successfully retested those December 3^rd lows on Friday, December 17^th. 

This retest occurred on light trading volume, which tells me that it should be safe to invest in the stock market, since most of the risk has been wrung out. As I have mentioned several times, the last week of the year (between Christmas and New Year’s) is an excellent time to invest, since most year-end tax selling has been exhausted.

Fortunately, the Treasury Department recently conducted successful Treasury securities auctions and although intermediate yields rose slightly, but briefly, the 10-year Treasury and other long bond yields remain remarkably stable. Due to robust international demand for Treasury securities, the Fed will continue to taper and further reduce its quantitative easing.

As we close out 2021, the U.S. dollar remains very strong, as international investors increasingly turn to the U.S., since we have positive interest rates (versus flat-to-negative interest rates in Japan and most of Europe) and a strong currency. Our economy is also in better shape than Europe’s or Japan’s. The ISM service index is at a record high, and the ISM manufacturing index remains robust, so fourth-quarter GDP growth is shaping up to make 2022 a year for the record books. Since approximately half the sales for the S&P 500 are outside of the U.S., a strong U.S. dollar should help create record sales and boost earnings.

Looking forward to 2022, I expect that growth stocks and dividend growth stocks will prosper. Why?

• First, although year-over-year earnings comparisons will become more difficult in 2022, a narrower market is good news for growth stocks and dividend growth stocks and bad news for the “index fund” crowd, since growth stocks and dividend growth stocks have traditionally prospered in a narrowing, more selective, stock market environment like this.
• Second, the Fed will likely remain reasonably accommodative after winding down its quantitative easing by March and perhaps raising key interest rates, starting in March – but in a gradual manner.
• Third, inflation will eventually decelerate, but it will likely remain above the Fed’s target rate through 2022. Inflation may fall under 3% by late 2022, which the stock market will likely celebrate.
• Fourth, the leadership of both the House of Representatives and the Senate are expected to change due to the mid-term elections, so Wall Street will finally get the divided government that it craves.

One other big change is that the pandemic accelerated technological change and boosted productivity in the U.S., so companies can now make more money with fewer workers. Investors can profit in artificial intelligence, with companies like NVIDIA (NASDAQ:NVDA); cybersecurity, with Crowdstrike (NASDAQ:CRWD), and Fortinet (NASDAQ:FTNT); 5G, with Alphabet (NASDAQ:GOOG), Cadence Design Systems (NASDAQ:CDNS), EPAM Systems (NYSE:EPAM), and Keysight Technologies (NYSE:KEYS); electric vehicles, with Ford (NYSE:F), Panasonic (T:6752), and Volkswagen (DE:VOWG); and semiconductor industries, with KLA-Tencor Corporation (NASDAQ:KLAC) and United Microelectronics (NYSE:UMC).

These and a few other companies are leading this new wave of higher productivity. Investors have a lot to be excited about.

Retail Sales Disappointed - But the Fed is Still Accelerating the "Taper"

Last Wednesday, the Commerce Department announced that retail sales rose just 0.3% in November. Overall, the November retail sales report was very disappointing and will undoubtedly lead to downward fourth-quarter GDP revisions. It appears that higher gas prices are “zapping” consumer buying power and may be impacting consumer sentiment.

The other big news on Wednesday was that the Federal Open Market Committee (FOMC) statement was surprisingly dovish in the wake of that morning’s disappointing retail sales report. Specifically, even though the FOMC statement implied that there would be three key interest rates hikes of 0.25% each for the federal funds rate in 2022, these rate hikes would not commence until the Fed ended its tapering.

The Labor Department on Thursday announced that new claims for unemployment in the latest week rose to 206,000. Continuing unemployment claims fell to 1.845 million. New unemployment claims remain near a 52-year low, and the fact that continuing unemployment claims keep declining is very good news. In my opinion, the Fed has fulfilled its unemployment mandate and can now concentrate on fighting inflation.