It’s just funny to me…
I’ve been writing about accelerating inflation for 17 months now. All the while, we’ve had to endure a Federal Reserve that chose to allow it to run up, and then basically denied its existence.
And while financial media companies have been right to call it out, they either don’t understand how it works… or they just don’t care.
And now that we’ve hit a 39-year-high level, how will inflation affect the holiday season for 2021?
Source: CNBC
CNBC’s headline here appears downright surprised that markets would go up on the news that inflation hit the highest level since President Ronald Reagan was in office.
But in fact, when inflation is rising, markets generally go up!
Source: Fortune Research
But CPI measures what happened last month, not this month.
In other words, it is a lagging indicator.
We, on the other hand, want to know where inflation is going… not where it’s been.
For the most part, that means we need to look at commodities. Because at the end of the day, those raw materials are what drive the prices of the things we ultimately consume.
Well over the past few weeks, those prices have been going down.
Source: Fortune Research, Bloomberg
Except for lumber — which is up a sneaky 100% over the past month — pretty much everything has either pulled back or flattened out.
Energy — primarily crude oil and refined products — comprises 7% of the calculation. And while the oil and gas sector hit cycle peaks in November, they have fallen over 20% in the time since.
Source: Fortune Research, Bloomberg
And food prices — which comprise another 13% — have been a mixed bag, with wheat, hogs, coffee and rice down on the month… dairy up slightly… and corn, soybeans and cattle all up between 3% and 4%.
Source: Fortune Research, Bloomberg
With about half of the entire commodities space now showing negative one- and three-month momentum, it’s safe to say that next month’s API print won’t be quite as “shocking” to financial media.
Moreover, those year-on-year comparisons only get harder from here on out. Inflation barely rose at all last November, coming in at 0.18% on the month. But by April, monthly inflation figures were pushing 1%.
Source: Fortune Research, Bloomberg
And since we already know December prices are lower than last month, I’m just going to say it…
Inflation has peaked.
Inflation and the Holiday Season 2021
As we head into the holiday season, that’s a good thing. It means family budgets will go a little further than they would have otherwise.
And that should pass through to the Consumer Discretionary sector, which is expected to put up solid Q4 numbers.
So while we do have monthly options expiry lingering next week, it’s hard not to look at Friday’s pullback in furniture retailer RH Inc. (NYSE: RH) and dress clothes stalwart PVH Corp. (NYSE: PVH)…
Both recently crushed earnings and are set up to reap the rewards of holiday spending. I love both at current prices.
Per Thursday’s commentary, I’m also keeping an eye on Coinbase Global Inc. (NYSE: COIN).
I like it a lot better at $250 than I did at $260. But that said, next week’s OpEx has me a little concerned on the tech side…
The professionals who were invested in bitcoin, other cryptos and tech this year crushed it. And we’re running out of time for them to lock in gains this year.
That means we could see some continued selling pressure in the tech and crypto spaces, at least for a week or so while that dynamic works itself out.
So while I think it’s OK to nibble here, I wouldn’t do more than that. We may get a better discount later.
From an energy perspective, the weather is projected to be unseasonably warm up and down the East Coast over the next couple of weeks.
That means we may have to bench gas and coal until there’s a change, which forecasts currently indicate to be the second week of January.
But we’ll address all these issues next week, when we should get a better reading on which direction volatility will head this holiday season.
At this point, the only thing that would surprise me is if the market did nothing.
Stay frosty, everyone, and don’t worry about inflation ruining your holiday season. Prices are dropping, so go buy some presents and enjoy your weekend.
All the best,
Matt Warder
Fortune Research
