The PPI rose in April by more than forecast, adding to signs of a growing wave of inflationary pressure that’s extending to American consumers. The data was the strongest since 2010 but all must remember the comparisons are against last year’s pandemic induced low levels.  Regardless, the gains were broad based and appear to be transitioning into the end user.

At casual glance it appears Wall Street cannot agree whether or not inflation is good or bad for stocks.  I will write instead inflation up to a certain point is positive for Main Street as opposed to Wall Street.  Nominal GDP—or GDP without inflation—will be the greatest in several decades.  Such an environment is typically Main Street positive.  For simplistic purposes I am defining Main Street as value and Wall Street as growth.

Heightened inflation fears are threatening to do something to computer and software makers that has not happened in two decades: make them the worst performing entities.  Very few are asking what happens if super high valuation companies of the FAAMGS revert back to average levels.

Leuthold Group commented the S & P 500 is at risk of falling 37% should the multiples to sales and earnings return to their mean levels since 1995. Bloomberg suggests the FAAMGs could shrink by another 24% from current levels if it goes back to the mean over the seven years before the 2020 pandemic.

It is widely known the cap-weighted S & P 500 valuation is nearly as extreme as it was at the tech bubble peak and any increase in inflation could greatly increase volatility.

Year to date Main Street is outperforming Wall Street by a considerable margin, an inverse of the last 14 months, the last five years and perhaps as many as 15 years.  Four months is nothing as compared to the last 14 years but the last 14 years were years of little or no inflation.

Commenting about yesterday’s market activity, led by value stocks, stocks halted a three-day slide, partially the result of a strengthening labor market.  There was little reaction to the PPI nor a Fed Governor’s pronouncement that inflation may exceed 2% through 2022.   I rhetorically ask how long does “transitory” last?

What will happen today?

Last night the foreign markets were up.   London was up 0.69%, Paris up 0.77% and Frankfurt up 0.73%.  China was up 1.77%, Japan up 2.32% and Hang Seng up 1.11%.

The Dow should open nominally higher as more tempered commodity prices helped allay concerns about inflation.  NASDAQ futures are up about 0.5%.  With this written however, crude is also up about 1.5%.  The 10-year is up 5/32 to yield 1.65%.


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