Market Extract: Equity Gains, Inflation, Sensationalized GDP

What’s going on in the market today, and how might your business, your portfolios, and your clients be impacted? The Market Extract aims to provide a condensed, clear, and highly relevant view, with insights from Advanced Asset Management Advisors’ investment committee to you. 

Last week saw equity market gains (S&P 500 +1.16%) with firm bond prices (10 year treasury down 5 bps). Growth sectors (Tech/Telecom & Discretionary) and Industrials led the market. Small Cap out-performed Large Cap by 95 basis points. All of this during a week when we saw confirmation of higher inflation in the Fed’s favorite core Personal Capital Expenditures (PCE) year-over-year gauge with a 3.1% print. This is the highest reading in at least 25 years.

The markets clearly believe the “inflation is transitory” mantra from the Fed. Speaking of the Fed, it is bizarre that while the Fed continues its historic quantitative easing (QE) run, they are at the same time draining system liquidity in the form of reverse repos to the tune of $450 Billion. The reverse repos wipe out months of QE—keep in mind that the QE buys mortgages and Treasury coupons while the reverses drain overnight money. The Fed has been backed into a yield curve control position in their attempts to keep longer yields down and short-term yields from falling below zero.

After the inflation print, confirmation of the first quarter GDP was likely one of the more significant news items last week. The headlines have been sensational over the last year, with the “31% GDP decline” followed by a “33% GDP gain” in the 2nd and 3rd quarters last year. Remember these are annualized numbers. The actual quarterly decline and rebound were -8.9% and +7.5%. Now we have headline growth of “6.4%” in the first quarter.  Not annualized, that first quarter growth was 1.6%. 

To put these wild swings into perspective, we look back to the 4th quarter of 2019—the last peak of Real GDP. The blue line indicates the progression of real, seasonally adjusted GDP in dollars. The green line is nominal GDP (The difference in their progression is inflation).  Despite the sensational headlines, real GDP has yet to exceed the level of quarter 4, 2019.  Current estimates suggest the number should print a new high this quarter.

Chart that shows the difference in Real GDP and Nominal GDP, seasonally adjusted.

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

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