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Inflation Trades Perk Up While The Bond Market Yawns

CAMS Weekly View from the Corner – Week ending 7/30/21

August 2, 2021

In recent days D.C. has informed us that the long suggested Infrastructure bill is gaining traction toward passage. Time will tell if this comes to fruition and equally important, what it will actually entail. On this news in the latter part of the week the stock market chirped up inside itself with the collective inflation beneficiaries gaining the most traction. Importantly, nothing changed on a trend basis even within the broad inflation beneficiary groupings but they were stand-out performers. As a note of interest it was quite eye-catching to see stock market participants were most enthusiastic toward inflation trades in the midst of developing news that the Infrastructure bill was moving along to some degree. They seemed to be more focused on the printed money and ensuing debt that it would take to pay for it and hence went right toward said inflation trades.

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For a general and yet concise visual the above vehicle contains inflation beneficiary holdings by design. We are merely using this as a tool to depict, in one fell swoop, the price action in recent trading days via our red arrow. Importantly, as stated, nothing changed on a trend basis (there is no trend currently) but the knee-jerk action was a quick rush to inflation beneficiaries. Treasury Bond Market And then we have the Treasury bond market’s reaction. In a word – they yawned. A market that is hell-bent on watching for collective price inflation on a forward basis and they offered there was nothing to see here dear stock market – move along. Interesting. In fact, their lack of similar action only continues their now multi-month message that price inflation and an overheating economic backdrop is not what they are seeing down the near-term timeline. Interestingly, we also seen the U.S. economic growth indicator – GDP – came in well below expectations last week. Is it this type of result that the Treasury bond market began predicting back in mid-May? More importantly, with their relentless message are they suggesting more of the same? And if so, this takes us back to the stock market with a follow-on question of whether the stock market is prepared for weakening economic growth? All interesting questions based on continual observations of inter-market behavior in recent months. We have chronicled these oddities in various editions as we continue to do so today.

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In our previous edition we shared the above chart of 30 year Treasury bonds on a yield basis. The above is annotated differently to accentuate the relentless message of down trending interest rates (known as yields) by bond market participants via a 20 day moving average. The red arrows are pointing to the 20 day yield average via the solid blue line. With each passing trading day the previous 20 day average is calculated and hence creates a moving average. The significance is 20 days is a short period of time for a moving average. When a market relentlessly stays below this length of average for what is now becoming months we know they are steadfast in their message. We find it interesting, in light of the aforementioned stock market reaction to various economic and D.C. policy initiatives, that the above Treasury chart does not even reflect a chirp attempt let alone a move above the 20 day average. We feel we are at an important stage here. If the Treasury market puts in a lower low from here, on a near-term basis, it may be a tall order for the stock market to go happily about its business if you will. Realize the S&P 500 is up just over 3% since the bond market began its message back in May. We all know 3% can disappear in a day. And for its part the well recognized Dow Jones Industrial Average is up just over 1% in the same timeframe. The point is obviously the stock market itself is not on a roaring rally trend by any stretch. We are heeding the bond market message and are cautious until and/or if various areas of the stock market can create a new level of upward trend.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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