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Muted Inflation Data Helps Stabilize Interest Rates and Pump Up Stocks

March 15, 2021
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Monday Morning Q.B. - Market Observations:

  • Muted Inflation Data Helps Propel Stock Market
  • Mostly Stable 10-Year Treasury Yield, Except for Friday, Aids Stock Market, too
  • Small-Cap Stocks (Russell 2000 Index) Hits Record High
  • Stimulus Bill Finally Signed into Law…Should Be a Boost to Small Businesses
  • Financial Stocks Up Six Weeks in a Row…It's Been A While Since this Happened
  • Homeowners' Cash-Out Refinancing Hit Numbers Not Seen Since Before the Financial Crisis
  • For the 11th Consecutive Year, Study Shows Actively Managed U.S. Large-cap Funds, as a Group, Underperformed the S&P 500

Monday Morning Q.B. - Market Performance:

U.S. stocks moved broadly higher for the week, lifting most of the major benchmarks to new record highs.

The Dow Jones Industrial Average rallied almost a thousand points finishing the week at 32,778, a 4.1% gain. The technology-heavy NASDAQ Composite added 3.1% closing at 13,319.

By market cap, the large-cap S&P 500 added 2.6%, while the mid-cap S&P 400 added 5.3%. The winner of the week were clearly the small-caps with the small-cap Russell 2000 rising 7.3%.

Inflation? What Inflation?

The Labor Department reported last week that inflation had risen 0.4% in February compared to January and 1.7% year over year. Core inflation, which excludes food and energy, increased 1.3% year over year.

Remember, from the last two weeks of the MMQB, the Federal Reserve is looking for a sustained inflation rate at or above 2% year over year. We are not there yet!

However, we might get there in the short run.

Many economists believe that when our economy fully opens, demand will outpace companies' ability to hire and train up new employees to meet the surge in demand. 

This will potentially create higher prices and short-term higher inflation until staffing levels out and prices can again normalize.

Fed Chairman Jerome Powell has said he thinks the rise in prices will be "temporary". However, it will take until the summer to know whether this is the case or not.

Also, the inflation numbers typically are quoted as year over year increases or decreases. Should we be fully open in the summer, the year-over-year comparison will be to last summer's shutdown peak, making inflation appear higher than it is.

We Finally Have Another Stimulus Bill Signed into Law

By now, everyone who wanted to know the new stimulus bill's general provisions has heard about it from one source or another.

The new $1.9 Trillion bill is in addition to the $4 Trillion already spent on Covid-19 relief during the Trump administration. We, as a country, have taken unprecedented steps to get out of this virus mess.

As a quick recap, the new bill's main provisions include $1,400 direct payments to each qualified person, based on married couples making less than $150,000 and single filers making less than $75,000. It also expands the unemployment benefits for an additional $300 per week through September. The bill also provides additional funding for Covid vaccine distribution, more testing, and increases for contact tracing programs.

The arguments center around the total amount of money spent on Covid-19 relief as well as how much of this bill addresses issues not totally related to Covid.

The political wrangling came over the added subsidies for people receiving their health insurance through the Affordable Care Act.

Some of the other controversial elements centered around reducing poverty in America. Provisions within the bill provide for the expansion of the earned-income tax credit, child tax credit, and making more money available to support the food assistance program.

Our concern is not the politics of the bill. That is for other people to debate. Our concern is the effect on markets and where money should be invested.

Let's Address the Growing Debt Concern First

Yes, the concerns of many relate to the overall spending on Covid relief as our national debt continues to rise, which many believe ends with runaway inflation.

This concern is valid. However, GDP growth may exceed 5% in 2021, according to many economists. Growth can help cover multiple sins, one being overspending.

Think about a household. If you hear of a family increasing their spending 20% in a year, one could conclude that the additional spending was likely financed, and the debt will come due at some point. This family just put themselves in a worse financial situation. 

What if the same household increases their income by 30% at the same time? Then the debt is looked at differently.

Yes, they have more debt, but they have a better ability to pay that debt off through the rise in income. They may be better off financially now even though they increased their spending.

You cannot have a debt conversation without an income conversation as well. The two go hand in hand.

Neither political camp is necessarily wrong. It is just too early to tell.

A lot of money potentially may be made in the stock market before the chickens come home to roost. Look at the run in the stock market after the Great Financial Recession.

The same concerns were raised then, and the stock market entered a Bull Market that only ended last year.

A simple waring: Do not let politics play into your portfolio decisions.

Small-Caps are a Potential Double Winner with the Passing of the Relief Package

Based on the experiences of the past pandemic stimulus bills passed, one can conclude that much of the stimulus checks get spent.

The stimulus checks are used to increase spending, pay down debt or invest. However, unlike the previous checks, especially the early summer 2020 check, we are in a different place with the pandemic itself.

The U.S. consumer is less concerned about a dire outcome and more excited about a world with a vaccinated public, a pandemic in retreat, and the restrictions on travel and leisure being reduced or lifted altogether.

All this says the stimulus money is going to give a boost to our economy.

Small businesses may be the ones to benefit the most.

Instead of sitting at home buying from Amazon, maybe this time around, it is off to the local pub to meet up with a small group of friends and have a beer, or a family dinner night out at the preferred restaurant that you could not wait to go to again.

Along with the likely increase in demand, another win for small businesses was eliminating the proposed minimum wage hike to $15 per hour.

Big companies can swallow the increase in labor cost, but the wage hike certainly would have hit the bottom lines of smaller companies who cannot easily absorb the cost or pass the cost on to their customers.

Small-company stocks have been the darling of the stock market so far in 2021.

The stimulus bill will likely keep the momentum for small-company stocks going. Our current discipline is overweight small- and mid-cap stocks as well as value overgrowth. Last week was another record-setting week for the Russell 2000 small-cap index.

All eyes this week will be on Fed Chairman Powell, parsing his every word from Wednesday’s open market committee meeting.

Investors will be looking to hear any change in policy. Could the Fed intervene with a change in monetary policy if interest rates continue to rise?

Many believe that this is the largest threat to the rising stock market. We will be listening.

As always, we are here for you. Do not hesitate to call with any questions, comments, or concerns.

Have a great week!

(sources: all index return data from Yahoo Finance; Reuters, Barron's, Wall St Journal,,,,,,,, Eurostat, Statistics Canada, Yahoo! Finance,, Chaikin Analytics,,,,,,, W E Sherman & Co, LLC)
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