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13.07.2021
US equities & inflation - a regime shift?
In our “Inflation – Friend or Foe?” observation we simply added up the number of S&P500 single stocks with a positive relationship with US inflation expectations (‘inflation tailwind’), versus the number with a negative relationship (‘inflation headwind’). Updating that chart today reveals an interesting shift.
Tuesday
There has been a sharp rise in the number of US single stocks who suffer in an environment where inflation expectations are rising. And a corresponding fall in the number who benefit from reflation. The latter still outweigh the former by around 2:1 but the change is notable.

It should be noted that macro explanatory power is declining for US equities. The S&P500 is now out of regime; & this exercise only includes models where confidence is at least 65%. That total is now 240, so around half the index.

Even with those caveats though it is worth considering the possible implications of this shift. One potential explanation is that US equities are reverting to a ‘bad news is good news’ mentality. A negative relationship means lower inflation expectations are consistent with higher US equities; i.e. disinflationary fears ensure the Fed keeps monetary policy easy.

Maybe this is how we square the circle. Bond markets seem to be pricing in a growth scare while equities hit fresh highs. The two only work in tandem when equities feel the Fed’s policy stance provides underlying support.
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