Week Ending May 14th, 2021

Stocks slipped back from record highs last week after investors saw real signs of inflation in the economic data. The Core CPI jumped by 0.9% in April, which rattled the stock market. It appeared like people had woken up to the term inflation last week. But stocks recovered from weekly lows after it was reported on Thursday that jobless claims dropped to 473,000 in the week ended on May 8th and April retail sales were almost flat as reported on Friday.

One has reasons to believe that inflation is by product of expanding economy and it is a transitory phenomenon as Fed believes. But I think inflation this time would be more or less like in between the most understood meanings of Transitory and Persistent Inflation. I think we are in a tug of war between temporary and long term inflation. As both cost push inflation factors as well as demand pull inflation factors are at play. The tariffs, de-globalization, supply chain constraints and changed behavior of China are going to keep on affecting inflation expectations in future.

I think it’s time to take investment decisions tactically based on structural changes happening on the supply side. And I advise investors to stay invested and keep some kind of protection in their portfolios in case our worst inflation fears materialize in reality.