In May, the Consumer Price Index for All Urban Consumers rose 0.6 percent (seasonally adjusted); rising 5.0 percent over the last 12 months (not seasonally adjusted). The index for all items less food and energy increased 0.7 percent in May (SA); up 3.8 percent over the year (NSA). The 5% CPI year over year increase is the sharpest increase since 2008.
Yet, the 10-year treasury yield went down, not up upon the release of the May CPI number . The bond market probably thought that the economy is not that great as the perfect re-opening of the economy has all been priced in. And mostly importantly, perhaps the inflation is indeed transitory as the Fed has been saying all along.
We believe the inflation concern has been overblown. The narrative of value to growth rotation based on the inflation concerns is just a trading opportunity for the market participants. Growth stocks were overbought and now after three months selloff, the growth stocks are attractive again. The value stocks are now overbought and therefore the rotation from value to growth is happening. There are too much money in the system. The market participants are constantly conjuring up themes to place money in where appears to be with reasonable valuation.
Last week, the NASDAQ and S&P 500 closed above their perspective close that occurred on May 7th. However, the DOW is still below its highest close that occurred on May 7th.
The divergence between the NASDAQ, S&P 500 and DOW is signaling the rotation from value to growth is happening!
The cyclical/value stocks have peaked and therefore are retreating from the spotlight. Growth stocks will take the spotlight from value and you will hear from the media about this value to growth rotation again. It looks so much like the game of music chairs!
In our last blog, we talked about the new digital economy. We are sure that the mega tech such as Amazon, Apple, Google and Facebook will continue to grow, but because of their sizes, they have attracted so much regulatory attention. The super growth in the next decade will not come from the old mega tech as they have matured into a difficult position. The super growth will come from the smaller companies that are charging ahead with AI in the digitization revolution.
The digitization revolution got a nice start at the onset of the pandemic. It is far from over. The secular trend in digitization revolution is the reason why the bull market will go on for some time. The only nice way to solve the US debt problem is to increase productivity. The digitization companies will carry the heavy load pushing up productivity.
All is well with the bull market and all is well with the growth stocks!