After the COVID-induced selloff in March 2020, the US equity market has climbed strongly and steadily to new highs. For the whole of 2021, this has been earnings-driven, rather than multiple expansion. Certainly, the economy has rebounded. But in addition, behind the scenes, PROFIT MARGINS are running at record highs! It appears that the pandemic and lockdowns have driven significant cost-cutting and technology-led efficiency gains.
What does this mean? Firstly, companies can afford to pay higher wages and input costs and this doesn’t have to feed through to consumers. So perhaps this really will be the “good” type of inflation. Secondly, with strong earnings, no multiple expansion this year and possibly good inflation headlines, the medium-term outlook for US markets is rosy. Keep an eye out for a jump in productivity figures.
Inflation is always and everywhere a monetary phenomenon. Although we at Kieger are by no means committed monetarists, this chart lends more credence to the idea that inflation will be moving lower in the next months.
The huge withdrawal of central bank liquidity happening currently is truly “unprecedented” (an otherwise-overused term currently). Despite all of the detailed analysis on the effects of quantitative tightening no one can predict the full impact this will have, but it is certainly not Fed Chair Yellen’s 2017 expectation of “watching paint dry”.