CPI surged 4.2% in April from the previous years, representing the largest year-over-year inflation appreciation since the summer of 2008. Compared to March, April illustrated a 0.8% increase in consumer prices as the long-anticipated pricing pressures finally start to hit the fan, and this is just the beginning.
The magnitude of monetary & fiscal stimulus infused into the pandemic-ridden economy combined with a massive level of pent-up demand has created an environment where high inflation is inevitable. The question is, how high will it go and how long will it last?
Federal Reserve Chair, Jerome Powell, has stuck with his guns on the “transitory” nature of this inflationary period that is just beginning to take off. The markets seem to be puzzled by what transitory inflation really means. Does this mean a few months, a few quarters, a few years? Jerome Powell has been perhaps the most dovish chair in Federal Reserve history, and he is prepared to let inflation run, but he is not stupid. There is a level of inflation where it becomes destructive to the economy, and once we reach that point, he will be forced to utilize some hawkish levers to control it.
The markets are currently operating under the assumption that crazy inflation will force the Fed’s hand to taper its balance sheet and push the Fed Funds rate up sooner than anticipated (the balance sheet tapering/roll-off happens first). This is why we are seeing significant valuation multiple contractions in high growth names over the last few weeks. The denominator in their valuation models is rising.
Now it is time to reposition your portfolio for this inflationary period, and I provide some of my favorite picks for this rising price environment.
Stocks I Discuss:
Teledyne Technologies
TDY
, Equinix
EQIX
, Freeport-MCMoRan
FCX
, and SPDR Energy ETF
XLE
.
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