Historically, June is the second weakest month on Wall Street after September. However, this year, it is likely to end in positive territory despite growing concerns of an impending inflation and the Fed’s sooner-than-expected rate hike signal.
Markets Unperturbed Despite Inflation Threat
The personal consumption expenditure (PCE) price index jumped 3.9% year over year in May, its highest since August 2008. The core (excluding volatile food and energy items) PCE — Fed’s favorite inflation gauge — climbed 3.4%, its highest since April 1992.
The consumer price index (CPI) — popularly known as household inflation — jumped 5% year over year in May, its highest since September 2008. The core CPI climbed 3.8% in May, marking the largest monthly gain since 1992. Moreover, the producers’ price index (PPI) soared 6.6% in May, historically its highest monthly rise.
Despite mounting inflationary pressure, the large-cap centric indexes like the S&P 500 and the Nasdaq Composite have rallied 1.8% and 4.4%, respectively, month to date. The Dow is down marginally by 0.3% so far in June. The small-cap specific Russell 2000 has surged 2.9% month to date while the mid-cap centric S&P 400 has remained almost flat. Three days of trading are still left this month.
The Fed has signaled a rate hike as early as in late 2023 and the beginning of the tapering of its $120 billion bond-buying program per month possibly in early 2022. Yet the yield on 10-Year U.S. Treasury Note continued to hover around 1.5%, far below its recent high of 1.778% recorded on Mar 30.
Inflation Likely to Promote Growth in 2021
The U.S. economy is yet to reach its pre-pandemic level as some parts of it are still not operational. Higher inflation means higher aggregate demand, which will enable businesses to deploy higher capital spending and recruit more manpower.
Moreover, businesses can generate higher profits despite raising the wage rate. The spread between higher inflation and higher wage will increase their profit and in turn encourage them to increase their scale of operation. Consequently, job creation would also increase.
Consumer spending, the biggest driver of the U.S. economy, remained steady. Personal spending in May increased by less than 0.1% while April’s data was revised upward from 0.5% to 0.9%. Astonishing personal savings of around $2.6 trillion should support pent-up demand going forward.
Theoretically, inflation is generally helpful for debtors as their repayment of loan will be less valuable in real term (after adjusting inflation) than their borrowed money. Therefore, higher inflation together with a low-interest rate regime should lead to heavy deficit spending by the Federal government.
Inflation Appears Transitory
The central bank is still expecting the recent augmentation in the general price level to be transitory. On Jun 22, in his testimony before the House Select Subcommittee on the Coronavirus Crisis, Powell reiterated that inflation will be transitory as most of the recent price rise will not prevail in the long term.
The recent thrust of the demand-pull inflation will settle down once the initial euphoria of pent-up demand evaporates and the existing $300 per week unemployment benefit comes to an end in September. The cost-push inflation due to supply-chain disruptions and labor shortage problem is expected to cool down to a great extent by this year-end as businesses are already looking for affordable alternative sources.
In fact, the headline PCE inflation rose 0.4% month over month in May, lower than the 0.6% surge in April and March. Likewise, the core PCE inflation grew 0.5% month over month in May compared with 0.7% in April.
Moreover, a recent report of
The Wall Street Journal
revealed that after adjusting for the base effect, inflation may not be as severe as reported by the government agencies. Per the Wall Street Journal report, after adjusting for the base effect, the CPI in May rose much lower by 2.5% from the pre-pandemic level.
Finally, despite raising its projection for the inflation rate in 2021, the Fed Chairman said in his post FOMC statement that inflation will cool down to a little more than 2%, Fed’s long-term inflation target, in 2022 and 2023. This is exactly what the central bank was looking for when it changed policies in the Jackson Hole Symposium in August 2020.
Our Top Picks
At this stage, it will be prudent to invest in growth stocks with a favorable Zacks Rank. We have narrowed down our search to five large-cap (market capital > $10 billion) stocks that have strong growth potential for the rest of 2021 and witnessed solid earnings estimate revisions within the last 30 days. Each of our picks sports a Zacks Rank #1 (Strong Buy) and has
Growth Score
A. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Exxon Mobil Corp.
XOM
made multiple world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. It recently announced another significant oil discovery at the Longtail-3 well, offshore Guyana which added to the prior estimate of gross recoverable resource of 9 billion barrels of oil equivalent. Moreover, the company also has a strong presence in the prolific Permian where it continues to lower its fracking & drilling costs.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 0.8% over the last 7 days.
Zoom Video Communications Inc.
ZM
is undoubtedly the biggest gainer of the coronavirus-induced remote working trend. Demand for its platform and solutions is expected to remain robust as healthcare experts believe that some form of social distancing will remain to prevent the recurrent transmission of COVID-19 infections. Moreover, its freemium business model helps in winning customers rapidly, which can later be converted into paying back customers.
The company has an expected earnings growth rate of 39.52% for the current year (ending January 2022). The Zacks Consensus Estimate for the current year improved 27% over the last 30 days.
Southern Copper Corp.
SCCO
engages in mining, exploring, smelting, and refining copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile. The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 1.8% over the last 7 days.
Ulta Beauty Inc.
ULTA
operates as a beauty retailer in the United States. The company’s stores offer cosmetics, fragrances, skincare and haircare products, bath and body products, and salon styling tools, salon services including nail products and accessories.
The company has an expected earnings growth rate of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for the current year has improved 21.3% over the last 30 days.
Burlington Stores Inc.
BURL
operates as a retailer of branded apparel products in the United States. It offers fashion-focused merchandise, including women’s ready-to-wear apparel, accessories, footwear, menswear, youth apparel, coats, toys, and gifts, as well as baby, home and beauty products.
The company has an expected earnings growth rate of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for the current year has improved 16.8% over the last 30 days.
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