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Before the Bell Morning Market Brief Before the Bell Morning Market Brief May 13, 2021 MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist Quick Take: U.S. stock futures pointing to a higher open; European markets are trading mostly lower; Asia ended down overnight; West Texas Intermediate (WTI) oil trading at $64.45; 10-year U.S. Treasury yield at 1.69%. Markets Churn As "Hotter" Inflation Sparks Growth Concerns: Yesterday, stock prices fell across the board, as rising inflation levels in April spooked already jittery investors. The NASDAQ Composite (down 2.7% on the day) and Growth stocks more broadly took it on the chin. Inflation levels last month looked much hotter than most expected (more on that below), prompting a further push into cyclical value stocks at the expense of Technology/Growth areas. While the market was broadly lower yesterday, the trend of cyclical value outperformance continued to mitigate overall declines on Wednesday. The Dow Jones Industrials Average (down 2.0%) and several value-based sectors were lower yesterday but did hold up better than the NASDAQ. As the FactSet chart below shows, the Dow has seen a generally consistent trend higher this year (until recently) — driven by a more concentrated exposure to cyclical value areas of the market. These value areas are seen as more leveraged to strengthening reopening trends and less impacted by rising inflation levels over the near term. In February, the NASDAQ turned sharply lower on inflation/interest rate fears, while the Dow was able to push higher and eventually create performance separation on the heels of a strengthening recovery. In our view, the NASDAQ is seeing another bout of selling pressure with inflation concerns again moving top-of- mind. The possible negative implications for rates, their impact on discounting future earnings streams, and potential Fed policy adjustments add to the stew of concerns Tech/Growth areas are facing at the moment. FOR IMPORTANT DISCLOSURES PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT Notations: For further information on any of the topics mentioned, please contact your Financial Advisor. Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2021 Ameriprise Financial, Inc. All rights reserved. Page 1 of 11 Before The Bell May 13, 2021 ____________________________________________________________________________________________________________________________ The NASDAQ is off 6.7% in May on a price-alone basis and down 7.5% over the last three months. The Composite is slightly more than 8.0% off its all-time high, while the S&P 500 Index and Dow are each roughly 4.0% away from their market tops. We won't pretend to know where the bottom is when it comes to the temporary selling pressure across the NASDAQ, but we can provide some markers for investors to watch. Yesterday, the Composite fell sharply below its 100-day moving average, which had previously shown pretty good support in March and February. The next critical level would be the 200-day, which is roughly another 4% below current levels. Again, it's hard to say when the selling pressure might subside in the NASDAQ. But we believe at some point, the secular growth drivers across several of the underlying companies in the NASDAQ could attract "buy-the-dip" activity. We may see some nibbles today, based on NASDAQ futures. As the second FactSet chart below highlights, consumer price inflation (CPI) is ramping higher on a year- over-year basis. In April, headline CPI spiked +0.8% month-over-month, while core CPI jumped +0.9% month- over-month. "Actual" CPI levels in April were multiples of economists' expectations, with y/y headline inflation posting its largest gain since September 2008. Core CPI hasn't been this high since 1982, according to FactSet. However, we would stress that investors have expected higher inflation levels and have marked their calendars for easy year-over-year comparisons during the next few months for quite some time. Below are a few quick-hit items to keep in mind regarding April's inflation spike: Expect the next few months of y/y comparisons on inflation to look very elevated when compared to the depressed levels during the depths of the pandemic. We believe month-over-month comparisons moving forward could provide a better gauge of how much inflation is building in the economy as reopening trends gain momentum. There is still a massive disconnect in demand and supply dynamics that are forcing inflation higher. The recovery across the U.S. and the broader world is uneven, supply is constrained, while demand is surging everywhere. In our view, it may take time for certain companies and industries to ramp back to full capacity to meet demand requirements. As a result, a catch-up period may force prices higher temporarily until an equilibrium level in demand and supply is found. Gradually rising inflation is typically good for stocks longer-term. But large or sudden spikes in inflation versus expectations (like we saw in yesterday’s CPI numbers) can be disruptive. Although we do not expect a change in monetary policy this year in reaction to hotter inflation levels, markets will likely be more sensitive to the degree to which prices move higher. Nevertheless, prices can become "sticky" over time, and if they linger longer than most expect. We believe the market could be more focused, not on absolute levels in CPI, but on the possibility, higher prices will last longer. In this case, more persistent levels of inflation could weigh on growth trends, which could dampen demand and profit growth over time. In our view, this is the market's main concern regarding inflation right now. Also, implications for pulling forward tighter Federal Reserve policies are another outside worry for the market right now — though we would discount this dynamic. We believe the Fed is mainly on the sidelines for 2021, regardless of the inflation dynamics over the coming months. It's worth noting the Fed wants to see inflation levels above its target for some time. Outside of initial reopening momentum, it expects inflation will run hotter than its 2.0% target in 2021. ____________________________________________________________________________________________________________________________ © 2021 Ameriprise Financial, Inc. All rights reserved. Page 2 of 11 Before The Bell May 13, 2021 ____________________________________________________________________________________________________________________________ All of this has sent volatility higher and back above its 5-year average, as the third FactSet chart below shows. That said, volatility is still well below levels seen this time last year but is on the move higher. Notably, the sectors expected to benefit from rising prices/higher inflation are holding up well, with most actually advancing higher in May. As the Ameriprise table below shows, cyclical sectors have moved up in May and remained the clear market leaders over the last three months. Bottom line: We believe sectors like Financials, Materials, Industrials, and Energy could continue to see their business trends improve this year as the economy more fully reopens. All four sectors are expected to see some of their strongest earnings trends on record in the second quarter. Yet, we expect markets to churn over the near term, volatility to increase, and possibly, a healthy correction to develop in certain areas that have run higher for some time. But that shouldn’t detract investors from the generally positive macro set-up for stocks over the intermediate-to-longer-term, in our view. % Change 6- % Change 3- % Change MTD S&P 500 Sector Month Month Energy (CYC) 60.8 17.7 6.1 Materials (CYC) 26.0 15.0 3.1 Financials (CYC) 37.8 16.3 1.0 Health Care (DEF) 10.0 3.8 0.3 Consumer Staples (DEF) 4.6 5.8 0.1 Industrials (CYC) 21.0 12.3 -0.5 S&P 500 14.9 3.3 -2.8 Utilities (DEF) -1.5 2.9 -3.6 Real Estate (DEF) 13.1 7.4 -4.0 Comms Services (CYC) 17.1 3.8 -4.3 Technology (CYC) 9.2 -5.3 -6.0 Consumer Discretionary (CYC) 8.5 -2.6 -7.1 Sources: American Enterprise Investment Services, Inc., & FactSet. Price data as of May 12, 2021. (CYC) = Cyclical. (DEF) = Defensive. ____________________________________________________________________________________________________________________________ © 2021 Ameriprise Financial, Inc. All rights reserved. Page 3 of 11 Before The Bell May 13, 2021 ____________________________________________________________________________________________________________________________ Asia-Pacific: Asian equities finished lower on Thursday. Stocks ended the overnight session sharply down and in sympathy with the pressure seen in the U.S. yesterday. Tech led the decline, with indexes in Japan and Hong Kong some of the worst performers. Europe: Markets across the region are trading mostly lower at midday. European markets are broadly lower, with liquidity thin based on several European Union countries on holiday. U.S.: Equity futures are pointing to a higher open. Here is a quick news rundown to start your morning: The market is pulling forward tighter Fed policy. Based on hotter inflation readings in April, the market is increasingly pulling forward the Federal Reserve’s rate hike timeline. According to Bloomberg, eurodollar futures are pricing in 80% plus odds of a quarter point Fed Funds rate hike by the end of 2022, up from 66% on Monday. This is over a full year ahead of the Fed’s dot plot and is partly why investors are nervous about rising inflation levels. Stocks look set to open higher. After the Dow suffered its worst day since January yesterday, futures look set to reverse some of that pressure in Thursday morning trading. Tech stocks look to rebound a bit at the open, with NASDAQ futures running positive this morning.
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