Inflation, Inflation, Inflation

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LPL Research dives into the hotter than expected recent inflation data and explains why massive inflation down the road is unlikely.


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Inflation was the word of the week. In this week’s LPL Market Signals Podcast, LPL Research’s Ryan Detrick and Jeff Buchbinder dive into the hotter than expected recent inflation data and explain why they still don’t see massive inflation down the road. They also discuss the current economic cycle and note it still has a good deal of life left, plus some recent changes to LPL Research’s sector outlooks.

Inflation is here, but won’t stick around

April’s Consumer Price Index (CPI) came in up 0.8% from March’s levels—the largest jump since 2008—while core inflation (stripping out volatile food and energy) soared 0.9%, the highest since the early 1980s. Jeff identifies massive stimulus, a huge reopening, constrained supply chains, and a somewhat surprisingly tightening job market have all contributed to the jump. Ryan points out that there was disinflation last year, so comparing year-over-year makes things look worse than they are. Ryan explains how the majority of the jump in inflation came from things like used cars, hotels, car rentals, and sporting events—all reopening plays. The discussion concludes with Jeff pointing out that some of the major reasons inflation has been so low over the past decade plus are still in play – things like technology, globalization, the Amazon effect, productivity, and high debt (which historically is deflationary).

Why this economic cycle has plenty of life left

This economic cycle is likely nearing one year of growth, but it is important to remember that cycles of growth tend to last many years. Ryan points out that as we’ve become more of a developed country, longer cycles of growth are common. In fact, as the chart below shows, the average cycle of growth is more than five years and there’s a good chance this cycle of growth could make it that old. Jeff opines that LPL Research isn’t expecting a 10 year cycle of growth like the previous cycle because this hasn’t been your average recession—it has likely been the fastest ever (topping the six month recession from the early 1980s) and we aren’t seeing some of the usual imbalances worked off like we usually do during a recession.

Changes

LPL Research changed their views on certain sectors and Ryan and Jeff discuss those changes. First, we upped our view on small caps to positive, thanks to a young economic cycle and extremely strong earnings. Additionally, valuations appear reasonable. Next, when we looked at sectors, we downgraded healthcare as it is more of a mid-to-late cycle play and policy appears to be a headwind. Lastly, real estate has quietly improved and maybe be a steal reopening play as more and more people go back to the office and shopping malls.

Tune in now

Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunesGoogle Podcasts, or Spotify and find us on the LPL Research YouTube channel.

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IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Member FINRA/SIPC

For Public Use — Tracking: #1-05144680 (05/22)

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