Inflation Soars…So Do Stocks
This past Thursday was a bit of a headscratcher.
News came out that inflation numbers in May were scorching – higher than they’ve been in a decade. Usually, we’d see this cause a commotion in the bond market, sending yields soaring. Plus, we’d often see a sell-off in tech stocks.
Instead, the opposite happened. Yields dropped and tech stocks climbed.
That’s what our hypergrowth expert, Luke Lango, will explain today.
As a tech-focused, hypergrowth analyst, Luke has been tracking inflation since it began to raise its head. That’s because inflation has a massive impact on prices in the tech sector.
But as Luke explains below, the feared inflationary-future that many have envisioned is appearing less likely…and that’s fantastic news for hypergrowth investors, resulting in one, clear takeaway…
The time to buy hypergrowth stocks is right now.
Enough introduction, I’ll let Luke take it from here.
Have a good weekend,
The Best Small Caps to Trounce Red-Hot Inflation
By Luke Lango
Something very weird happened yesterday – something that you should be aware of because it could be the difference between making a lot of money over the next few months, or not.
Here’s what happened…
Inflation numbers for May came in red-hot – much hotter than expected and the hottest they’ve been in over a decade.
The Consumer Price Index (CPI) rose 0.6% month-over-month and 5.0% year-over-year – well above expectations and the biggest jump since 2008. Core CPI, which strips out food and energy costs, rose 0.7% month-over-month, also above expectations.
Yet, the financial markets completely ignored the inflation print. Instead, they did the exact opposite of what you’d expect…
The bond market typically responds to hot inflation by selling bonds and pushing yields higher. This accounts for the dilutive effect inflation has on the time-value of money. But yesterday, yields dropped, and not by a little – by a lot.
That’s the weirdest thing I’ve seen in a long time…
And, to make matters weirder, the stock market acted in a similar odd way.
Markets typically respond to hot inflation by selling rate-sensitive tech stocks and buying macro-sensitive cyclical stocks. But yesterday, tech stocks surged higher and meaningfully outperformed cyclical stocks.
It was “opposite day” on Wall Street.
What’s going on here?
Well, the scorching May CPI report actually convinced the market that inflation is, indeed, transitory.
To grasp “why,” look beyond the headline inflation number and see what’s actually driving inflation in the U.S. economy.
Once you do that, it becomes clear: This inflation isn’t going to last.
Long story short, red-hot inflation in May was driven by categories with supply chains that have been temporarily disrupted by Covid-19. The disruption in those supply chains will be rectified in the coming months. Meanwhile, in the “stickier” categories which have historically been the persistent drivers of sustained inflation, price surges in May were actually muted, and prices actually slowed from their pace in April.
For example, used-vehicle prices increased 7.3% month-over-month in May. That’s a huge gain. But it’s entirely because of the chip shortage, which is resulting in a supply shortage in the auto market at the same time that demand for autos is soaring as consumers look to spend their stockpiled savings accounts.
This won’t last.
The chip shortage is already abating. Vehicle production is already rebounding. Consumer spending is already slowing. The supply-demand dynamics in the auto market are balancing out, and as they continue to do so in the coming months, used vehicle prices will stop soaring.
Meanwhile, in May, energy prices – which are most normally considered the biggest driver of persistent inflation – were flat month-over-month. They didn’t go up in May.
The food inflation rate held steady at 0.4%. The shelter inflation rate slowed from 0.4% in April, to 0.3% in May. The transportation inflation rate also slowed, from 2.9% in April, to 1.5% in May. Medical care costs actually dropped in May by 0.1%.
In other words, inflation is red-hot right now – but it’s red-hot because of near-term supply-demand imbalances that will quickly rectify in the coming months.
When they do, inflation will cool off dramatically, and we will be back in an economy that is struggling to break a 2% inflation rate.
That’s great news for hypergrowth stocks.
Hypergrowth stocks are particularly rate-sensitive, because they derive almost all of their value from future earnings, which have a higher present value in a lower rate environment, and a lower present value in a higher rate environment.
Easing inflation fears will lead to lower yields which will lead to sharp rebound in hypergrowth stocks.
We are already starting to see this play out in the market. Over the past month, the Vanguard Growth ETF (VUG) is up nearly 7%. That’s a big gain for a broad ETF in just a month.
This is just the beginning. Over the next few months, inflation will continue to subside, yields will continue to slide, and hypergrowth stocks will keep bouncing back, with more vigor than ever before.
The time to buy hypergrowth stocks is right now.
Alas, the million-dollar-question: Which hypergrowth small-cap stocks should you have on your radar today?
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Editor, Hypergrowth Investing
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.