This is a holiday-shortened week in the US but there is some important data on tap.

Retail sales are expected to show a month-to-month rise for the first time since September. Year-over-year numbers remain pretty subdued and likely will until life returns to something resembling normal.

Producer prices will likely rise but inflation continues its benign ways. It is likely we’ll see prices surge on a year-over-year basis later in the spring, but that will just be a base effect from when prices were falling at the onset of the virus last year.

Industrial production has been in a steady uptrend since hitting bottom last April and this report will probably show more of the same. In fact, if I had to pick a report that might provide a positive surprise, it is this one. The production side of the economy is actually in decent shape.

Housing has been a bright spot but housing starts and existing home sales are both expected to moderate in this week’s reports. 

Last week’s reports were light and about as expected. The JOLTS report was right in the middle of meh. Job openings were up on the month and year-over-year. But Quits and Hires are both down considerably over the last year (over 6% for each). The jobs market is, at best, in a holding pattern as employers – and I suspect potential employees – continue to await the end of the virus. 

Inflation expectations are rising as nominal bond yields rise and real yields tread underwater but the CPI confirmed the lack of actual inflation, at least for now. I am not sure at all how things will look six months or a year from now but bond traders sure seem to think they do.

Wholesale inventories continued to creep up with sales; the inventory/sales ratio remains stable at 1.31, a relatively low number.

Finally, I included the German industrial production report which I found surprisingly strong considering the degree of shutdown in Europe. 

Risk assets continued their historic run last week, with EM equities and commodities leading the way. Bonds sold off as the 10-year Treasury note yield broke above 1.20% for the first time since the lows last spring. My short-term target remains around 1.4% but that is merely a guess derived from basic technical analysis. Longer-term, I see no reason yields can’t get up to the 2% level, but there is a lot of water yet to go under that particular bridge, so let’s just stick with the fact that the trend right now is up. More concerning to us here at Alhambra is the continued weakness in real yields. The 10-year TIPS yield closed the week at 1.02%, near the all-time low and reflective of either extreme concern about inflation or lack of real growth, or both. The rise in nominal rates has been all about rising inflation expectations so far which despite the fervent desire of the Fed and all other mainstream economists, is not something to be cheered. Stagflation is not a desirable outcome even in its mildest form.

The leaders so far this year are US small-cap stocks, commodities (which has been broad-based but led by energy), and EM stocks. Asia has been the best performing region with China leading the way. Japan’s performance has been steady and kind of under the radar. The Nikkei actually broker above 30,000 today for the first time since 1990. 

EM and commodities leading are exactly what we expect in a rising growth, weak dollar environment, which is how we continue to classify the current environment. The dollar had been rallying this year – not much and slowly – but was down last week. I think the dollar has a decent chance at a rally with sentiment quite negative but for now, the trend is still down. 

We would also expect value to outperform in a weak dollar environment, but so far we’ve only seen short spurts of value outperformance. 

The “things will get better when the virus is gone” trade took a little bit of a breather last week, with cyclical and materials stocks both performing poorly.

Financials continued to perform well, likely a function of a steepening yield curve. Financials have underperformed the last few years but the longer-term record is still pretty good with 5-year returns of nearly 16%/year.

The big winner on the week and of the last three months was energy. We took a position in energy stocks last fall and it has been rewarding so far. A correction, however, would not be a surprise at the moment as sentiment has turned quite positive. We are looking to add exposure on any pullbacks.

Defensive investments have been underperforming for some time now as focus shifted to vaccines, the imminent end of the virus, and a widely expected surge in economic activity (color us a bit skeptical of that post virus boom scenario). That includes defensive stocks such as utilities (see below) and gold, which has been in a pretty steady bleed lower since the peak in early August. Healthcare has also been weak relative to other sectors YTD. One exception are the biotechs, which we own in our Citadel and Alhambra portfolios. Biotech is up 12.7% YTD.


Joe Calhoun