Who’s worried about inflation now? The market doesn’t seem to be, and the general public apparently isn’t either. That makes it a good time to start betting on continued inflation.
It seems like yesterday that everyone was worried about runaway inflation. Now, those fears are on the wane. The amount of inflation priced into the five-year Treasury Inflation Protected Securities (TIPS) has fallen to 2.49% from a high of 2.72% in May, while a Bank of America survey last month revealed that 72% of respondents thought inflation was transitory. Even Google searches for the word “inflation” are down 80% from where they were on May 12, and even lower than they were a year ago.
Inflation, however, has not gone away. Nearly everywhere you look, inflation metrics are coming in hotter than expected. It was there in General Mills (ticker: GIS) earnings, when the company said it would increase prices to cover the costs of rising input costs. And it was there in the Institute for Supply Management manufacturing survey, where the prices paid for component rose to 92.1 in June, the highest since 1979.
“Readings above 90 in a diffusion gauge with a maximum of 100 are extremely rare for obvious reasons,” writes Marketfield Asset Management CEO Michael Shaoul. “Once again it may prove that the peak shock from inflation is ‘transitory,’ involving an overshoot for a wide variety of prices, but this does not mean that it cannot also be a turning point in the broader trend of inflation, disrupting the multi-decade trend towards lower price indexes.”
You don’t have to be a believer in a 70s-style price surge or even that inflation will remain low because of demographic issues to acknowledge the potential for inflation to run hotter for at least another year or two, writes JPMorgan strategist Eduardo Lecubarri. “While some (ourselves included) argue that the recent spike in inflation will be temporary within what remains a structurally inflation-low interest-rate environment, others believe we are in the early innings of a prolonged rise in inflation,” he explains. “Whichever is the case, it seems sensible to assume that inflation will remain elevated compared to its recent history during the remainder of 2021 and potentially part of 2022 at least.”
As a result, JPMorgan screened for small- and mid-cap stocks that outperformed during periods of rising inflation following the financial crisis. They include Kronos Worldwide (ticker: KRO), Crane (CR), EnPro Industries (NPO), Casella Waste Systems (CWST), NL Industries (NL), Exponent (EXPO), Stamps.com (STMP), Atrion (ATRI), Neogen (NEOG), World Acceptance (WRLD), Netgear (NTGR), and Coherent (COHR).
Ultimately, though, it doesn’t matter how investors get some inflation exposure, as long as they get it. “[The] risk of fading economic growth amid potentially not temporary inflation is very real,” writes The Seven’s Report’s Tom Essaye. “And that remains one of the biggest risks to the broader markets right now.”
Even if it looks like it’s gone.
Write to Ben Levisohn at Ben.Levisohn@barrons.com