Not Only is There Light at the End of the Tunnel, but the End of that Tunnel is Getting Ever Closer

Mar 12, 2021 | Nick Scholte


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While inflation is set to move higher in the short-term owing to pandemic-fueled "soft" year-over-year comparables, the case for sustained inflation is far more uncertain.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 2.6%; the U.S. Dow Jones Index finishing up 4.1%; and the U.S. S&P 500 finishing up 2.6%.

Echoing my comments from last week, inflation continues to capture investors’ attention. This week, the news was somewhat friendlier as the Consumer Price Index (the official U.S. measure of inflation) came in modestly lower than expected at 1.3%. While jitters still abound about the direction inflation may take – particularly as year-over-year inflation rates begin to be measured against the lockdown-fueled depressed months of March/April/May of last year – I and RBC feel that it may be premature to anticipate sustained inflation (the pending March/April/May blip upward notwithstanding). Also, remember that even if inflation does soon blip up above the 2.0% long-term target of the U.S. Federal Reserve, the Fed has pledged to allow the economy to “run hot” for some time such that average inflation over time amounts to 2.0%. In other words, inflation must be sustained above 2.0% before the Fed raises interest rates.

The economic news continues to trend for the better. A $1.9 trillion stimulus plan has been passed in the U.S. and cheques will begin to be delivered by as soon as tomorrow. There is a ton of pent-up demand awaiting to be unleashed (think airline travel; going to a restaurant again; visiting a mall and being comfortable to linger and browse there; movies; theme parks etc.). Yesterday saw weekly jobless claims come out very near the pandemic low. Last week’s array of the BiG 3 indicators (Monthly Employment, ISM Manufacturing, and ISM Services) all indicated robust expansion. While the decline in covid transmission rates appears to be stalling, this likely owes to the tendency of individuals to relax their guard as conditions improve. And conditions are improving. Per the New York Times, it is estimated that some 30% of the U.S. population has been infected with covid (those officially diagnosed + those who were never diagnosed) and another 18% have received at least one dose of vaccine. Of course, there will be some degree of overlap between these two groups, but accounting for this overlap, it might be estimated that about 40% of the U.S. population now has some level of protection against covid transmission. Bottom line: not only is there light at the end of the tunnel, but the end of the tunnel is steadily approaching. I’ll continue to add to equity (i.e. stock) exposure in client accounts on pullbacks.

That’s it for this week. All the best and stay safe,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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