Inflation Is Coming But Will It Be Transitory?

The factor swings that started after the vaccination data came out in November haven’t stopped in 2021. It has been breathtaking. There are three segments of the market. There are the cyclical value stocks that benefit from the reopening and rising rates. Then there are the high growth secular companies that benefited from the lockdowns and low rates. The new 3rd part of the market is the meme stocks retail investors love. This is different from cult story stocks that have beloved brands and high valuations. Some investors on social media revel about how little fundamental research they have done.

As you can see from the chart below, the spike in retail trading in 2020 and 2021 means retail volumes are almost as large as mutual funds and hedge funds combined. Retail investors aren’t bothered by the 10-year yield rising. The biggest fundamental shift in their activity should come when the economy reopens. We think they will spend their stimulus money on real economic activities instead of investing it in the stock market.

The latest crazy factor move was on Tuesday when the big cap internet stocks exploded. It was a great day for growth and meme stocks. The meme stocks have taken over some of the value indexes making them useless. Going back to 1996, there were only 5 prior days where the S&P 500 rose as much as it did while having a net negative number of stocks advancing. The other examples were all when the dotcom tech bubble was bursting (outside of one day in November 2020). The huge rally in the secular growth stocks may have been a head fake. The strongest rallies occur in bear markets.

Small Business Confidence Increases Slightly

The NFIB small business confidence index was 95.8 in February which was just a 0.8 increase from last month. The NFIB index is finally done declining due to political reasons. However, it will likely stay suppressed until another Republican gets elected president or the GOP controls Congress. As you can see from the chart below, hiring plans decoupled from the overall index which signals this was a political issue.

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