U.S. Investors Counter Inflation With Equities, Commodities, And Short Duration Fixed Income

A January 2022 survey by Edward Jones and Morning Consult showed the top concerns from Americans at the time were inflation (83%), supply chain disruptions (77%), employment rate (71%), and interest rates (71%). Fast forward two months and those concerns certainly have not dissipated.

Looking at inflation gauges, the consumer price index (CPI) increased 7.5% over the last 12 months in January, marking the largest 12-month increase since February 1982. Core-CPI (excluding food and energy) rose 6.0%, its largest 12-month increase since August 1982. The producer price index (PPI) for final demand increased 9.7% while core-PPI rose 6.9% for the 12 months ending in January. Finally, the January personal consumption expenditure (PCE) index moved up 6.1% from one year ago, with core-PCE increasing 5.2%. Conclusion: consumers and producers alike are paying significantly more now than they were just one year ago.

Core-CPI (excluding food and energy) rose 6.0%, its largest 12-month increase since August 1982.
Refinitiv Datastream

"ThePPI) for final demand increased 9.7% while core-PPI rose 6.9% for the 12 months ending in January.” “=”” class=”” style=”-webkit-tap-highlight-color: rgba(0, 0, 0, 0); max-width: 647px;”>
Refinitiv Datastream

Moving to employment, the U.S. job market is continuing to heat up. The Department of Labor (DOL) reported Friday that employers added 678,000 employees to their payrolls in February as the unemployment rate fell to 3.8%, nearing ever closer to the pre-pandemic level of 3.5%. The DOL also published that the average hourly earnings for all employees on private nonfarm payrolls improved by 5.1% over the past year. Conclusion: the short supply of labor participants paired with rising wages increases inflationary pressures on the broader economy.

"TheDOL) reported Friday that employers added 678,000 employees to their payrolls in February as the unemployment rate fell to 3.8%.” “=”” class=”” style=”-webkit-tap-highlight-color: rgba(0, 0, 0, 0); max-width: 647px;”>
Refinitiv Datastream

The DOL also published that the average hourly earnings for all employees on private nonfarm payrolls improved by 5.1% over the past year.
Refinitiv Datastream

As nations reemerged from lockdowns, producer supply could not meet the raging consumer demand. Supply chain channels were only further disrupted when the Ever Given clogged up the Suez Canal back in March 2021. What is not highlighted in the current macroeconomic data is how the Russia-Ukraine conflict plays into the picture.

What we can say with certainty, however, is that Russia’s invasion of Ukraine will continue to strain the production and imports of global goods. Mercedes-Benz Group, Hyundai, Ford, Renault, and BMW have all announced they will be closing Russian plants. Oil and gas companies also gave notice of divestiture from Russian assets—Exxon Mobil, BP, Equinor, and Shell were among some of the companies to do so. The growing list of companies also includes Apple, Netflix, Visa, and Mastercard. Unprecedented worldwide sanctions against Russia’s economy, oligarchs, and stakeholders will only add to this disruption. Conclusion: with global supply chains continuing to become more strained, Europe’s heavy reliance on Russian gas, and Ukraine/Russia contributing around 30% of the world’s supply of wheat, upward pressure on commodity prices will more than likely continue to surface in the coming weeks/months.

oil, gold and equities
Refinitiv Datastream

How will the U.S. handle the overheating economy?

President Joe Biden during his State of the Union address committed to fighting inflation as his administration’s top priority saying,

“Lower your costs, not your wages. Make more cars and semiconductors in America. More infrastructure and innovation in America. More jobs where you can earn a good living in America instead of relying on foreign supply chains, let’s make it in America.”

In Federal Reserve Chair Jerome Powell’s speech to Congress, he indicated that the central bank still intends on raising rates by a quarter percentage point in its March 15-16 meeting followed by incremental increases throughout the year. He did add a caveat, however, that the Russia-Ukraine geopolitical conflict has added significant uncertainty into the fold, saying,

“I do think it’s going to be appropriate for us to proceed along the lines we had in mind before the Ukraine invasion happened…In this very sensitive time at the moment, it’s important for us to be careful in the way we conduct policy simply because things are so uncertain, and we don’t want to add to that uncertainty.”

An interesting takeaway from Powell’s talks was when he was asked by Senator Richard Shelby (R-Ala.) if he would follow former Fed Chair Paul Volcker’s example in raising rates to such a high level that a recession could occur. Powell responded, “I would hope history will record that the answer to your question is yes.”

How have investors been positioning their portfolios?

Since the beginning of the year, investors in U.S. funds have retreated from money market funds (-$112.5 billion), taxable fixed income funds (-$30.2 billion), and tax-exempt fixed income funds (-$12.1 billion), while pouring into equity funds (+$60.8 billion).

2022 year to date by asset class
Refinitiv Lipper

In January, 80% (+$23.4 billion) of the equity inflows over the month went toward non-domestic funds— $5.8 billion into domestic funds. February saw a dramatic flip—81% (+25.6 billion) of the February flows moved into domestic whereas non-domestic funds only attracted 19% (+$6.0 billion).

domestic vs non-domestic equities
Refinitiv Lipper

The below charts highlight the 10-top Lipper classifications by year-to-date inflows and outflows. Classifications with inflows greater than 5% of the total assets within that classification are Lipper Loan Participation Funds (12.5%), Lipper Commodities Precious Metals Funds (5.0%), Lipper Short U.S. Treasury Funds (7.3%), and Lipper Equity Leverage Funds (8.5%). These significant inflows as a percentage of the total assets showcase unique tactics to combat both rising rates and prices.

top 10 year to date inflows
Refinitiv Lipper

Year-to-date outflows show all of Lipper’s growth equity classifications reporting outflows along with significant outflows as a percentage of assets coming from Lipper High Yield Funds (6.26%) and Lipper Consumer Services Funds (8.6%).

top 10 year to date outflows
Refinitiv Lipper

Conventional funds and ETFs
Refinitiv Lipper

Check out more weekly flow trends here.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

https://seekingalpha.com/article/4493632-us-investors-counter-inflation-equities-commodities-short-duration-fixed-income

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