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Market Pulse: On inflation and the market

The focus these past two weeks has been on Jerome Powell’s comments about inflation prospects and future rates. In short, the Fed sees more inflation than earlier thought and it sees rates rising sooner.

David Vomund

The Fed will give the market a heads-up well ahead of any change in asset purchases (the so-called tapering) or a boost in rates. Powell and the Fed now expect two rate increases late in 2023, a bit sooner than earlier forecast. There were seven members of the Open Market Committee who expect the first rate boost next year due to rising inflation.

The Fed is either making a policy mistake of historic proportions or years of modest inflation will prove Powell right in keeping rates low and buying Treasurys. This could go either way. For now I’ll assume Powell will be right about inflation being a temporary affair.



The Fed’s credibility is at stake. Today’s monetary and fiscal policies are appropriate for a recession. Expand the money supply and run deficits in the trillions. But we are not in a recession. On the contrary, GDP has grown. The fly in this ointment is called inflation.

Visit the supermarket, pharmacy, car dealerships and stores of all kinds and you’ll see rising prices. They are also rising for services. No one should be surprised. The Treasury and Fed have been pumping trillions into the system to boost demand while supply is being inhibited by supply chain issues and shipping bottlenecks. Too much money chasing too few goods defines inflation (thank you Milton Friedman).



Investors seem unconcerned about inflation. The 10-year Treasury, a good proxy for inflation expectations, yields 1.48%. Junk-bond yields hit a record low this week as investors are taking more and more risk to nail down lower and lower yields. Stock indexes are near their all-time highs.

The market’s best values continue to be among energy (like Kinder Morgan), financial and materials stocks. I also like some healthcare stocks, especially those with good yields and dividend growth (Merck, Amgen and Pfizer, for example). For growth investors, I like Zoom Video Communications (ZM).

Thanks to the vaccines we came out of the recession sooner than most expected and earnings growth will be almost without precedent this year. Stocks will set new highs in zig-zag fashion with modest swoons from time to time.

The catalyst for higher prices will be the one I mentioned last year and often before. Money has to go somewhere, and for the foreseeable future by far the most attractive asset class will be stocks. Nothing Mr. Powell and the Fed can do will change that anytime soon.

David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.


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