09.06.2021
Inflation - friend or foe?
US CPI is released tomorrow & arguably the critical question for stock pickers is whether inflation is positive for their holdings - reflecting a healthy economic upswing - or negative as it results in an early Fed tightening, or compresses margins.
This is normally done via bottom up analysis of company fundamentals. Qi offers a quantitative macro view. The chart below looks at S&P500 single stocks & identifies those with a positive relationship with inflation expectations (as measured by US inflation swaps) versus those with a negative relationship.
This is the independent pattern of association between single stock & inflation. All other factors - economic growth, commodities, the Dollar, interest rates etc - are all held constant. Then we simply sum up the number of S&P500 stocks with a positive (tailwind) & negative (headwind) relationship with inflation.
This is the independent pattern of association between single stock & inflation. All other factors - economic growth, commodities, the Dollar, interest rates etc - are all held constant. Then we simply sum up the number of S&P500 stocks with a positive (tailwind) & negative (headwind) relationship with inflation.
Those arguing inflation has the potential to hurt US equities would expect the blue line to rise. It did over Q4 2020, presumably reflecting Biden’s election win & the anticipation of fiscal easing. But the Georgia win at the start of 2021 actually saw a sharp fall. The market initially interpreted the Democrat’s clean sweep as an unambiguous reflationary boon for equities.
By March, the number of stocks worried about inflation rose as markets started to fret about overheating. More recently that has turned again & currently 411 benefit while 95 fear inflation. Not definitive but one way to empirically look under the hood & see unfolding relationships, enabling stock pickers to marry their bottom up analysis with macro factors.
By March, the number of stocks worried about inflation rose as markets started to fret about overheating. More recently that has turned again & currently 411 benefit while 95 fear inflation. Not definitive but one way to empirically look under the hood & see unfolding relationships, enabling stock pickers to marry their bottom up analysis with macro factors.
