The battle between inflation and economic growth continued last week, when we saw the market sell off early in the week. This is only to recover and then close higher at the end of the week.
A Bloomberg report says the market is stabilizing after the biggest retreat in 11 weeks, with the focus on the benefits of an economic rebound outweighing the worry about the negative sides of inflation…. For now.
Friday’s retail sales report was weaker than expected, with economists expecting 1% growth – but that remained unchanged. This led to treasury prices rising, and gave the market its push to close the week on a better foot.
While the S&P closed lower on a weekly basis, the recovery in the second half of last week suggests people are still looking to buy the dips.
Any signs of reduced inflation – for example, iron ore prices falling 11% from the highs after Chinese government controls – will support the market.
On the other hand, if inflation rears its ugly head, the market will respond with more selling.
The bottom line is this: the market wants to go higher, but if the recovery is creating higher prices for the manufacturers and service providers, then there will be a point where this is passed on to the consumers.
This fear will feed into stock prices as margins are reduced and valuations could be lowered.
Another concern is the virus. The CDC announcement on mask guidance last week is surely welcoming news for American business that was affected by the virus. This change is also one of the factors that support the S&P recovery last week.
On the flip side, Singapore and Taiwan – 2 nations that have done well in controlling the spread of the virus – have imposed new restrictions due to an increase in infection rates.
The contrast between these 2 nations and the US could not be more different.
What it does tell us is that virus and its variants are still a treat, and it is still too early to declare victory. One can only imagine if nations like Singapore and Taiwan and all their good work can still have growing infections, will we see the same for the rest of the world?
While it is truly my desire to see us get rid of this virus, or at least get it under control, I fear we are still far from archiving that.
So, the reminder is, we have seen volatile moves in markets because of Covid. We have seen big upside moves whenever we see positive outcomes from combating the virus. While we have the hindsight to guide us on any resurgence, if any, it would be wise to keep an eye on any new developments with regards to the virus.
This commentary was written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.
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