Rising Tide Lifts All COVID Boats

While COVID cases have been sinking here in the United States, new jobs are rising (559,000 in May), corporate profits are rising, housing prices are rising, commodities are rising, consumer confidence is rising, the economy (i.e., GDP) is rising, and stock prices are rising. More specifically, the S&P 500 was up +2.2% last month (+14.4% for the year), the NASDAQ climbed even faster +5.5% (+12.5% for 2021), and the Dow Jones Industrial Average was flat (+12.7% year-to-date).

Although the economic tide may be lifting all boats, there is a small leak spreading in the boat in the form of inflation. Rising prices can slowly sink all boats by eroding away income and wealth creation. Fortunately, Jerome Powell, the Federal Reserve Chairman is doing his best to patch the inflation hole by signaling an end to Quantitative Easing and eventually initiating interest rate hikes by 2023. Inflation is currently running hot at 5% over the last 12 months (see chart below), but the long-term trajectory remains consistent with 2% trendline growth (see Calafia Beach Pundit).

Source: U.S. Inflation Calculator

Gas prices certainly have not gone down as you can see from the gasoline data below from GasBuddy.

The Fed still perceives inflation as temporary (i.e., “transitory”) due to short-lived, supply-related bottlenecks caused by a surge in demand after the broad, post-COVID economic reopening. Restaurants are filled; hotels and flights are packed; cruise ships are back out at sea, and workers are returning to the office. All these factors are causing a big swell in demand for goods and services, while suppliers are finding it difficult to hire workers fast enough to meet the flood of orders. Just last week, American Airlines (ticker: AAL) canceled 950 flights in part due to its short-staffing and inability to meet the avalanche of demand.

Infrastructure Spending Serves as Life Jacket

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Disclosure: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other ...

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