Inflation, Inflation, Inflation

RYAN (00:00):

Hi, everybody. Welcome to the latest LPL Market Signals podcast, Ryan Detrick here, and Jeff Buchbinder on the lineup in Boston. Jeff, we've been giving some updates on our injuries. How is your ankle doing?

JEFF (00:14):

It's better, thanks Ryan. But I'd say I'm a little disappointed that the healing hasn't accelerated I'll, I'll say it that way, but I'm, I'm in a pretty good place right now. How's the back?

RYAN (00:26):

So you're saying inflation is accelerating faster than the healing on your ankle is how you’re saying? A little tease on what we're going to talk a lot about. Yeah, the back, I guess I'd say it's better. Remember last week when we did this, I said, I couldn't even sleep at night. And I’ve been sleeping better, but it still hurts. Like yesterday I was feeling great. I was up walking around. I didn't sit all day. Right. I didn't sit at all. I was up walking around, running around doing stuff and it felt really good. And then as soon as I sit down and it just starts hurting again, a few of you have sent in some ideas and things to do, so thank you. I'm willing to try just about anything at this point, but I am supposed to, I think today, so who knows if my phone rings and it's take a live phone call on this podcast, supposed to get an MRI scheduled this week just to, just to double check and make sure nothing's really wrong in there.

RYAN (01:06):

But anyway, it is what it is, doing a little bit better, but we've got a lot to discuss and, and we'll talk about some more stuff here, but Jeff, you know, this week on the LPL Market Signals podcast, we're going to spend a lot of time on inflation. It feels like every week we talk about inflation, but what  happened last week with CPI coming in hotter than expected, PPI hotter than expected. I mean, Barron's had a cover story on inflation. We're going to spend a good amount of time, again, talking about inflation, which is starting to creep up there. Going to do a little economic roundup, a kind of a discussion on why this economic cycle of growth, you know, it's not even a year old yet, in all likelihood, and it might have several years left and then we're going to finish things up with some changes we've made at LPL Research in terms of sectors and kind of some of our views, a little update on kind of how we see the investment landscape. Always you know, change. Not always, but sometimes we make some changes. We're going to talk about that today. So Jeff, first things first, you see “Bennifer” is back? Ben Affleck and J-Lo or back together. Do you see that?

JEFF (02:05):

I did see that. If you're looking for me to comment on it, you're going to be disappointed, but I did see that.

RYAN (02:12):

I don’t have any comments either. I just think it's funny, right? I mean, it's like, is there a spot in there, like Montana, you think you're safe in Montana for no one to find you, but the paparazzi is everywhere, man. I guess they found them now, I guess, you know, it's a, it's a shameless plug to say everything comes full circle, right? Everything. I forget when they were together the last time it was a while ago and they both had different relationships. So they found each other again, kind of like full circle, which brings us to inflation. Right. We're going to spend a lot of time. We've heard you loud and clear. I feel like we've been talking about inflation a lot, but again, we're going to talk more about it because it's really what everyone's talking about. You know, this week we had the CPI number come out you know, much hotter than expected.

RYAN (02:51):

I've got it scribbled here in front of me. So here's some of the numbers. Month over month came in up 0.8% expected to be up 0.2%, hottest, I’m going to use word hottest, hottest since June 2009; core, that strips out the volatile  food and energy numbers, month over month up 0.9% expected to be up 0.3%, hottest since April of 82. And I did see that, that beat, even though it doesn't sound like a lot, it actually, that's a really big beat if you think about it. That was a six standard deviation beat. So out of a billion chances, that's only happened twice. It happened last month. It feels like in the world of finance, we see these five, four, three, six standard deviation events quite often. Let's not forget when oil went negative last year by negative what, 38 or 37 bucks a barrel.

RYAN (03:38):

I don't even know what the standard deviation of that was. No one thought it would happen, but it did. And now energy has really come back. Year over year up 4.2%, hottest since September, 2008. And the core, year over year, if you're watching along the YouTube channel, is up 3%, hottest since 1996. A lot of things there, Jeff. You know, high level, it does seem like inflation showed up faster than most people expected. You and I were talking about maybe this summer, we could see two and a half, three, three, and a half GDP. It's happening, GDP, wrong word, CPI. GDP is going to be higher than that. CPI. It's happening already. I mean, does this change your forecast, Jeff? Could we see even bigger numbers this summer with the CPI or what do you, what do you think here?

JEFF (04:20):

I think you have to push up expectations a bit, but still the key question is how sustainable will the inflation be after this surge? Right? Everybody knows we're going to get this surge, right. Front cover of Barron’s, right? It's all over all the financial media, right? You know, we have these base effects, right? Where when the economy shut down last summer/spring, you had that was a deflationary shock that set prices down. We're lapping those comparisons. So year over year, inflation numbers now are going to be very hot. That makes sense. What's a little bit you know, more interesting here, I think, is the month over month comparisons, right? When you have these big month over month changes, people annualize those changes, you know, makes you think, well, boy, could we, could we end up with like, you know, sustained four or 5% inflation? Clearly the Fed would slam on the brakes long before we got there. So it's a concern, but as we've talked a lot about, we think the you know, the pace of inflation will moderate here after we get through this, this surge.

RYAN (05:26):

Yeah, absolutely. If you look back, I guess, peel back the onion, as we like to say in our podcast here, where did the inflation come from? Right? Used cars were up like 10%, their highest ever, , I guess it was cars and trucks back to 1953, right? Rental car had big jump in inflation, airplane tickets had a big jump in inflation, sporting events, something I don't think anyone was doing last April, had a big jump in inflation. Rents, which are, you know, one of the bigger components to inflation, overall we're up 0.2% 20 basis points kind of right in line. So that's kind of a normal one, but it almost felt like to me, Jeff, when you looked at it, it was a reopening play, right? I mean, inflation saying, wow, we're actually reopening faster than we thought when you look at the things that were hired  Do you kind of agree with that assessment.

JEFF (06:13):

Oh, sure. Yeah. I mean, we, we went through all the components and tried to figure out what's reopening and therefore potentially temporary, what's not. And you know, you can debate that, but you know, probably 60, 70% of this at least is, is reopening and temporary. We've talked about there's temporary labor shortages in certain areas. There's, there's temporary chip shortage, right. Companies can't get semiconductors they need, that’s slowed auto production. There are a number of short term, you know, the bottlenecks, shipping, COVID-related disruptions and all of that. So we've got to get through all that stuff. And then I think the inflation numbers are going to moderate. It's just unfortunately going to take probably you know, at least three or four months to, to work through all of that.

RYAN (06:58):

Exactly. In the Detrick family we bought a used car, I guess it was in March, but a lot of people are out there buying, buying cars as well. Now you mentioned the Barron's cover. We are sharing it on the YouTube channel right now, but it says Barron’s, of course it says Barron’s. It says the “I” word. So that of course is inflation headline. You know, if you look at just various newspapers, I saw all over Twitter, people pointing out cover stories and all over the place, inflation, inflation, inflation. I mean, believe me, if inflation keeps going higher, it's not really going to catch anyone off guard necessarily right now because we kind of see it out there. But what caught me was if you go back exactly two years, April of 2019, there was a cover story by Bloomberg Business Week called “Is Inflation Dead?” with a dinosaur, which I guess the poor little guy looks dead there.

RYAN (07:47):

You know, so it's just amazing how two years later things change. And let's be honest, if you would have bought some of those commodities and things when we were talking about inflation being dead two years ago. Yeah. After the crisis, I guess that we had last year, everything was down, but it might not have been the worst time from a contrarian point of view to think everything's priced in. And of course, inflation, wasn't dead. Now we're talking about inflation going through the roof. So it's interesting from that magazine cover point of view. Now, some other stats that I caught over the weekend, I'm just going to read them here. Let's see, assuming I can read my handwriting. Chipotle up to $15 an hour. Domino's is paying drivers 25 bucks an hour. FedEx is paying $50 to sign on. McDonald's is upping pay by 10% for 10,000 workers.

RYAN (08:32):

Amazon's going to hire 70. What did they say? I think it's well, but that, okay, Amazon's got a thousand dollars sign on bonus and I think they're all, that's it. And they're looking to hire 75,000 more people with their minimum pay 15 bucks an hour. Yeah, so those are some of the big ones. And then we saw P&G came out and said that, Procter & Gamble, they're going to up a lot of their prices. Tissues who makes tissues? Kimberly-Clark is upping their prices. Tin, Reynolds and Reynolds, tin foil. Not everybody, that's a strong way to put it, but a lot of companies talked about inflation and potentially the inflationary prices that are coming on, going to have to up their prices that we, the consumer pay for things. And then, yeah, you've got companies that are saying, listen, it's hard to hire.

RYAN (09:17):

We've talked about that last week. Right? It's big miss in the jobs. Number one of the potential reasons is a lot of people were still making a lot more money just by working from home, right. A one in four people they're estimating or making more money by staying home, getting money from the government. So there's all these different factors, but now companies are saying, listen, we got to start paying more to get people to show up and it is showing up right now. Do you think that's going to work? Do you think paying more money will get people off the couch so to speak?

JEFF (09:44):

Well, those supplemental unemployment benefits I think run out in early September. So maybe for the next few months, you'll still see some of that. But you know, by the end of the summer, when we get a combination of hopefully pretty much the end of COVID restrictions and add to  that  to the fact that you know, we'll be sort of through some of these bottlenecks, hopefully, maybe not the chip shortage, but hopefully through some of these bottlenecks. And then if  potential employees are no longer making that extra money sitting at home, sure, you'll get more people out in the labor force. But what's interesting about this cycle is you know, we would normally not be in an inflationary environment when there's 8 million people unemployed. Right. Right. You know, inflation is largely, in the economy, driven by labor, right. I mean, that's what companies pay the most for. Right. The biggest piece of company's cost. So the fact that we're getting inflation now without a lot of participation from the labor market, with still some slack, is quite interesting. Now you have pockets of labor shortages that you might normally see later in an economic cycle, but nonetheless overall, there's plenty of people on the sidelines here. So maybe that can help decelerate the pace of wage gains over the next several months as more people get back to work.

RYAN (11:13):

Yeah, absolutely. Kind of reminds me of a joke my son just told me, he said, do you know what the how did, how did it go? Do you know what the vowel said to the consonant when he owed him money? Hmm. I don't think I know that one. I owe you.

JEFF (11:28):

Ah, well done.

RYAN (11:30):

Yeah. There you go. There's a joke for the day. So Jeff, we’re going to play a little game now, whose team are you on? This is kind of an inflation 2.0 discussion. What I'm calling it is team transitory, which I think LPL does side there, but I want to dig in a little bit more. We have President Biden obviously, and the Fed, Jerome Powell and Janet Yellen, I guess I didn't add her picture on the YouTube channel, but that's team transitory versus team in trouble. Right. Larry Summers and oh, who’s the other one? Dudley, William Dudley. So Larry Summers used to be with President Clinton, treasury secretary, and Dudley used to run the New York Fed for like a decade. Both of them have been very vocal. And again, they're more left leaning. They're not supply side guys. Okay. They are more left leaning.

RYAN (12:16):

They're not clearly trying to get a job with President Biden or his administration by what they're doing out there, but they're both coming out and saying, listen, the Fed's behind the eight ball. There's too much stimulus out there. We don't need this much stimulus. It's going to be inflationary and, or the Fed's going to be behind the eight ball, going to hike rates a lot more than they are letting on, or they're wanting to. By the way, if you look at Euro dollar futures at the end of last week, it's an 80% chance ithere will be at least one rate hike next year in 2022. It was about two thirds or so at the start of the week. So again, I don't think that's too crazy. Maybe later in 2022 is probably when that first hike will be. The Fed said, it's going to be much later, but the market's maybe calling their bluff a little bit.

RYAN (12:54):

Jeff, I mean, you know, so we have the two sides here and they're really digging their heels in. It's going to be a really fascinating, historical, if you will, when it's all said and done what happens. And if we have the runaway inflation or not. Let's just play devil's advocate. We've been very clear, we're team transitory. I mean, what, where do you think team trouble is coming? Where do you think they could be right? I mean, well, what kind of keeps us up at night with this inflation argument?

JEFF (13:19):

Well, we know the economy is going to boom. And so maybe some of these shortages linger for a couple of years, right? That's one way you could potentially get worrisome inflation and then, you know, inflation's very closely tied to expectations, right? When people expect low prices, companies can't raise prices. Right? Well maybe if, if this does go on longer, a couple of years of high inflation, maybe that gets embedded in people's expectations and then companies are allowed to raise prices, which could cause the inflation to be a little bit stickier. And then, you know, last point we're not even at a full employment level yet. Right? I just mentioned we got 8 million more jobs to get back just to where we started pre-pandemic. We could see even more, again, playing devil's advocate. We could see more inflation pressure when wages really start to move broadly higher through the economy. If they start to do that once we're at full employment, it becomes even harder for companies to find the workers that they need.

RYAN (14:29):

Great points there. You know, the small businesses make up approximately half of all the jobs in the United States, the NFIB has a monthly survey, that we discuss sometimes, according to that survey, 44% of all the small businesses that they surveyed, I guess this would have been last month so probably the month of April. 44% said they're having trouble with openings or having trouble trying to fill openings. And 54% said that they could not find quality workers or quality candidates. So kind of a similar question. But there's similar answer there, but so both of those, just having trouble filling jobs, right? I mean, that's, that's the key thing, like you said, and that's why the wage pressures are starting to come. And there's some unique things, we've talked before about copper and industrial metals and some of those things, which historically are more inflationary, the grains going higher as well.

RYAN (15:14):

That could be the market's way of saying a little more inflation is coming. I think it's almost as simple as listen. If you think you're going to have six or 7% GDP growth, like we do this year, our friends at Goldman Sachs and other places actually have higher numbers on that. You're probably going to have a little bit more inflation, right. In a perfect world who doesn't want 10% GDP growth and one and a half percent inflation. I don't think you're going to get it all. You're probably going to  get a little bit more inflation when you have a GDP number pushing six, seven, eight, 9%, wherever we're going to end up this year. I think that's just kind of how it works. Now, Jeff, let's talk about team transitory. I feel like they've done it before, but it's very important to dig back in there, you know, kind of what are some of the major structural things that are out there that you think will kind of, again, we'll have inflation over the summer, but then put a lid on inflation. I guess we'll call it, you know, by the time we get to the fourth quarter and into 2022.

JEFF (16:01):

Yeah. You start with globalization. I mean, you could argue globalization on both sides of this debate, right? Because you could say it's slowing down as companies move out of China and you know, that the geopolitical threats increase, but at the same time, you know, there are plenty of other low cost labor sources around the world where companies can go. So the labor is too expensive here. You can find cheaper labor abroad, that's one. And then technology would be the second one I'd point out. You know, oil is an easy example, right? If you can get oil out of the ground cheaper, that should keep oil prices well contained. Right. But it's not just that it's, you know, it's, it's an uncomfortable narrative, but replacing people with machines, right? If, if you can you know, build machines and automate more jobs, which has certainly been happening for centuries, right? If you're going to automate more jobs that can take pressure off of prices, particularly wages and a long-term lead to more sustained contained inflation pressure. So I think those are the big two I would highlight.

RYAN (17:11):

You don't think they're going to get a machine to replace us on this podcast, do you. I don't know. Maybe they can get a machine to just tell stupid jokes the whole time. I hope not. I don't know. Hopefully we're safe.

JEFF (17:20):

That’s why you have to talk about, you know, appliance repair and injured ankles or backs because no machine can come up with that stuff.

RYAN (17:28):

Exactly. Yeah. I mean, I saw T2, right. Remember T2. I mean, those guys had no personality. They're just killing machines. So we bring a little personality to the whole thing and I will, I will point out. So we talked a lot about CPI. I don't think I mentioned PPI. PPI on Thursday, that's the producer level, came in hotter than expected. So again, it just kind of laid on the concerns about higher inflation. The one thing I'll point out Jeff, although you just laid out some good ones there. We've got a lot of debt, right? Well, that's number one question. Trust me anymore is inflation. I mean, that's, we get asked that a lot, but debt was probably number one a few months ago. And historically a lot of debt is more deflationary. So you could say, believe me, a bunch of that's not great.

RYAN (18:05):

I don't think anyone would agree there, but it, it could be another potential factor to put a little cap on the overall inflationary environment, as we do have a lot of debt in our country. So that's a good discussion on inflation. We'll keep talking about, if you guys want us to keep talking about it, it seems like you do, but hopefully that was you know, a good side, both sides, right? Team transitory and team trouble is coming. So Jeff, you know, one of the other big reasons people are saying we have, one of the reasons we think there's a lot of inflation, is just because of all of the policy response. I know we've talked about this before, and I am sharing the chart on the YouTube channel. Just how big is the response this time versus the financial crisis.

JEFF (18:46):

Yeah. As a percentage of GDP, if you add in the last package, it's six X, right. Versus what was done after the global financial crisis about 12 years ago. That that is unbelievable, right? I mean, obviously the crises were very, very different, but the response they, they just aren't in the same league. And you know, when you talk about potentially, after this infrastructure package, almost certainly, we're going to get a couple trillion of infrastructure spending this year, you add that and you're talking about, you know, a third of GDP in stimulus, which, you know, then you're getting up to like eight X versus the financial crisis. So this is why GDP potentially could grow double digits in Q2, right? This is why we're getting this surge in economic growth expectations, which of course is bringing prices along with it.

RYAN (19:47):

And just to have a little trip down memory lane, because I wasn't even sure, I checked this last night. March of 2020, we had the $2.2 trillion CARES Act, December of 2020, so just this past December, another 900 billion, which was kind of put on to help some of the things that were expiring with the CARES Act. And then this past March, we had the American Rescue Plan, $1.9 trillion, like you said, we've got approximately, I think it's 4.1 trillion that's out there, probably going to come in lower than that, the infrastructure plan and what we're calling the human infrastructure plan. So you add all those together. You're talking some real money and that's not even factoring what the Fed has done with its balance sheet, increasing the balance sheet, trillions and trillions of dollars, and continuing to buy $20 billion worth of treasuries and mortgage-backed securities. There's a lot of talk to the Fed potentially will start to taper, and they're going to announce it first. Maybe they announced it at Jackson Hole, the big annual symposium out there in Wyoming, Wyoming, Jackson Hole, Wyoming. Which state is it in Jeff?

JEFF (20:45):

That's right. Jackson Hole, Wyoming is right. Put on by the Kansas City Fed, my hometown Fed.

RYAN (20:50):

There you go. And I've never been, I've heard Jackson Hole is just an amazing place. I mentioned on the podcast a while back you know, how I went down to Jekyll Island where the Fed was kind of created, if you will, in 1910 or 1911. Fed didn't start till 1913, but they started the idea of the Fed on Jekyll Island, Georgia, a really cool island. So the other part of our country is Jackson Hole. Maybe someday I have to get out there and check out, check that one out. Anyway, the Fed might announce potentially tapering later this year or early next year then. So we'll be all over that. And talk about that a lot more. And the wide discussion is once the Fed starts to taper, they'll taper for about a year and then potentially can be that first interest rate hike that, you know,  the market again is expecting it'll be in late next year. So some good conversation there, maybe skip over that one. Jeff, did you get gas last week? Because boy, it was tough to do down here. How was the situation up in Boston?

JEFF (21:43):

Oh, much, much better here than down there. But I did not get gas last week, I'm not putting a lot of miles on the car these days, not going into the office.

RYAN (21:54):

Yeah. So down here, so again, I'm just south of Charlotte, Fort Mill, South Carolina, where LPL has a big, big office. It was crazy. Right. So my wife, I've talked about this before, she gets up, I don't even know what time, 3:45 to go work out at five o'clock and then she works out for an hour and she's home by like 6:20 or so. And she, like, I think it was last Monday, a week here today, she said like the gas station opens at five and there were all these cars on the street. She's driving, like what's going on? It's because this is like at 4:45, by the way, they're in line to go get gas. It's just been crazy. Fortunately, I had three quarters of a tank and I'm just kind of waiting. I drive like four miles to work four miles home.

RYAN (22:27):

That's about the extent of my, of my drive in these days. I'm working from home today. But, you know, when I go to work three, four days a week, and so I'm trying to save first off there, but it is really crazy at it. And you think about it, it's really, it's not like, you know, all the gas went away. It was just kind of like what I've been reading about, like almost in the seventies where people have this scarcity concern and they just start to go buy stuff just to buy it. And kind of like what you talked about that self-fulfilling prophecy, if you will, with inflation and looking at forward breakevens, like five-year breakevens on five-year inflation is at 13 year highs ten-year break evens, that's 10 year inflation is multi-decade high. I forget the exact number. It almost was like that, but it truly was, or still is almost crazy.

RYAN (23:05):

I just drove by a gas station yesterday, driving around. And it was, again, there are cars all over the place. So hopefully, I know a lot of you've been struggling with this. It’s back online, right. I guess they paid the ransom to the Russian company in Bitcoin, I guess, is what I read. But you know, they paid it, they did what they had to do. And now hopefully we're back online and people will start getting gas and don't have to worry about as much, but it's all you know, part of the potential, potential concerns that are out there. No doubt about it. So Jeff, this week in our Weekly Market Commentary, and I've got in front of me, let me find out what exactly we titled it. I wrote the thing, you’d think I’d know. “The Economy Picking Up Speed” is what we what we called it.

RYAN (23:41):

And again, half of this, you can read it on lpl.com by the time you hear this podcast. We focus a lot on inflation because that's a big part of the economy, honestly, but that was the second part of it. We also talked about the cycle of growth and Jeff I'll, I'll go a little more then I'll bring you in on the why we think this can extend, give you a little a heads up on what I'm going to ask you. But the bottom line is this cycle of growth is not even a year old yet. We don't know exactly yet when the expansion started. Our best guesstimate is June, July, August, sometime last summer, right? So one year expansion will be this summer. And again, that's not official. The NBER, National Bureau of Economic Research, has not called it yet.

RYAN (24:18):

But when you look at the data, it's very clear. The recession ended quite a while ago. The key thing, again, we share the chart on the YouTube channel, but I've talked about this before. You look at the last 10 economic cycles of growth. All right? The average cycle of growth is 5.3 years. So you think about it now, the last couple were like let's see, it's almost eight, 10, eight, and seven or six and seven years, almost 11 years, actually, the last one. As we've become a more of a developed country, we have longer cycles of growth. That's just how it works. But when our country was younger, we used to have panics and depressions all the time. Like it was a panic of 1871, a panic of 1874, crash of 1893. There was the panic of 1907, another one soon after. And that kind of created the Fed, if you will, in 1913, all those panics we were having, but that's just like an emerging country, right?

RYAN (25:04):

You have more booms and busts. Now we're more developed like a cruise ship. Once we get going, we kind of nice and slow, but it takes a while. So I guess what I'm getting at here is this cycle of growth is only a year old. We think there's very good chance unless we have some, you know, another, another exogenous event, like, I'm not saying we're going to, let's not have another a hundred year pandemic, but there could be something out there. But if we could avoid that, we could have, you know, four or five more years of growth and just be average, right. Nothing wrong with being average, we can hit five years of growth in this cycle after the recession we just had, I think we'd all take it. Now, Jeff, here's my question to you. At LPL Research, we're not expecting a 10 year cycle of growth  like we just had, or almost 11 years, I should be honest. Why don't we expect that? What was different this time? And I don't want to be the guy who says this time is different, but what was different? Why don't we think we'll get to about 11 years, like we did last time?

JEFF (25:53):

Yeah. I mean, thankfully we've been able to fix the problem fairly quickly, right? I mean, certainly at a massive human cost, but you know, the 2008-09 financial crisis took really four or five years to fix. Depending on how you measure fixed, you could argue it was even longer than that. Right? Well, this is an exogenous shock, right? The virus was the problem. The virus is close to being eliminated, at least in the United States. Hopefully it's not an issue at all in a few months. So when you, when you fix the problem quickly, it allows you to move on to a period of sustained economic growth sooner. So that's where we are now. I mean, the big question, you know, back to you, Ryan, is are we going to overheat sooner because that's often what ends cycles, right. And leads to your next recession. Could this be, you know, a three or four year cycle potentially if we overheat.

RYAN (26:51):

Yeah. I guess the short answer is anything's possible. Right? I mean, it very well could be with some of those concerns we pointed out earlier. It's still just not our base case. I mean, it just, I, I get over the base effect right. A year ago, things were horrible. CPI was down three months in a row for like the first time ever. Okay. I mean, things were terrible. Now, yeah, things are bouncing back now. So I think it's kind of one of those, you know, show me, right. I mean, so I'm a Bengals fan, unfortunately, as most, you know, Marvin Lewis always said, I see better than I hear. Marvin Lewis was our coach for 13 years, took us to five or six, six consecutive playoffs. And we lost every one of them in the first round. So go figure. But so I don't know,

RYAN (27:31):

Maybe I shouldn't be quoting that guy. But anyway, now I'm all upset thinking about the Bengals. I totally lost my train of thought there, but you know, the truth is it's like, show me, right. I know we had inflation for a week. I'm sorry, a month. Show me, you know, there's another thing. There's the PCE. That's the Fed's favorite measure of inflation. That's probably going to be a little hot. We get that one here coming up soon enough. But I want to see it extend for longer than just one month. Remember what master Yoda told us. Right. And he's a wonderful market technician, one, a wonderful fundamentalist master Yoda knows a lot of different things. He said one data point, a trend does not make. All right. So let's, let's remember that as we kind of move forward, we want to see more we don't want really want to see it, but we need to see a hotter continued inflation going forward.

RYAN (28:10):

And again, that's just not our base case. So really interesting discussion though. You know, Jeff, I guess I know we're getting to kind of some changes, but if we were to see more inflation, let's say we're wrong. Let's say, let's say, you know, team trouble is coming is right. And there's more inflation. The Fed has to hike rates a little sooner to kind of stave off inflation. And we overheat, if you will, at least for the next six months, let's say, how would you want to position a portfolio? You know, looking at equities, I'm talking about bonds, but looking at equities, how would you want to position it to kind of protect yourself if you will from, from trouble and more overheating and inflation.

JEFF (28:42):

Yeah. Probably start with natural resources, right? Commodity prices are going to go up in an inflationary environment. They have, that's certainly part of the market that's led recently. So you probably start there, you know, that means you probably end up doing better in value versus growth with you know, higher commodity prices. You're probably going to get higher interest rates. Certainly that tends to be more friendly for the value side of the equation. So, you know, that in terms of equity positioning is probably where you go. The, you know, interesting side, you know, continuing on commodities discussion, how about gold? I mean, gold is actually picked up a little bit lately after really being, I don’t know if I'd say left for dead, but you know, not really doing anything and losing a lot of attention to Bitcoin for quite a period of time now, all of a sudden it's starting to pick up speed. So that might actually be an interesting idea for folks who are maybe more worried about inflation than we are.

RYAN (29:39):

Absolutely. So you got silver in there too, which is kind of a precious metal and industrial metal, got some qualities of both, but those industrial metals, we've talked a lot about nickel, copper zinc. I mean, they all just, they all are just continue to be extremely strong, right? A multi-year highs all-time high. So it's a, those are potentially inflationary as well. So as we move forward here Jeff, I want to say I've got maybe the chart of the year. I don't know if it's the chart of the year, but I think it, you know, it's amazing. You look at retail sales last month, they were flat. Okay. Flat. They came in lower than expected, but year over year, retail sales increased more than 50%. The previous highest year we ever saw, I think it was like 12% or so. So just, just another way I think of showing and I get it.

RYAN (30:26):

It's all about the base effect that I talked about because a year ago, no one was spending any money necessarily or going out, they, you spend some money, I guess, buying toilet paper, right? Hoarding, toilet paper, and paper towels. But for the most part we weren't spending. So it’s just another truly amazing way. I am showing that chart on the YouTube channel. So I just, I don't know, a fascinating one. So time for some personal news on my daughter, Susanna, I mentioned was trying out for the cheer team. She made it. So that's exciting. So she officially is on the eighth grade cheer team next year. And she also like any 13 year old I'm infuriates me sometimes. So I've got a ring light right in front of me. Right. I'm using a ring light right in front of me, Jeff and I do a morning call with our more than 18,000 advisors.

RYAN (31:05):

Used to say 17, now we’re up to 18,000, more than 18,000 advisors. I couldn't find my ring light. I'm like panic and run around the house, looking for it. I know exactly where my ring light should be. Go down and ask Emily, my wife, where's my ring light. Do you have any clue? She's like, yeah, I think it's in Susanna's room. I'm like, oh, great. I go in there. It's like under a pile of clothes. She apparently borrowed it over the weekend. So we're a little talk about barring my ring light. I'm just going to buy her own. But nonetheless, congratulations to Susanna for making the cheer team there. And then Jeff, it's time to talk about our ice machines. I'll go second because I have ice. What's going on with you? You, you, I jinxed you by talking about my ice machine, not working right.

JEFF (31:42):

You, you totally jinxed me. My ice machine broke and it looks like I'm going to have to buy a new one. I wasn't, as lucky as you were, it was just a little part.

RYAN (31:53):

Yeah. Well, that's unfortunate. So as I've talked before, I haven’t had a working ice machine since like November before Thanksgiving and our washing machine broke like about a week ago or so. So fortunately I had a guy come in for like, I don't know, $355, the washing machine now works. And I said, hey, he's an appliance guy. Hey, can you take a look at this? And he looked, he was like, oh yeah. Okay. Yeah, I think I know what you need. And I'll, I'll email your text, your wife I'm okay. Fine. And she sends me this part on eBay. It's like 29 bucks, two or three bucks to ship it. I'm like, okay. So I order it. So yesterday the part comes in, maybe the part came in on Saturday, on Sunday I spent about, oh, I don't know, 45 minutes or so. And the beauty of YouTube, I typed in the part, I typed in how to install it.

RYAN (32:35):

There was a guy I took the, I use, like, I was really proud of myself. I was a combination like MacGyver and Tim, the tool, man Taylor, I think yesterday, because I had to take the ice machine out, had to use, I had to turn the power off. I had to use a screwdriver and plug it in a certain way and twist a certain way. And I pull the whole ice machine out and take this thing apart, put this piece in and put it back together. I put it all back together, turn the power on. I'm thinking, you know, first I'm going to shock myself to death, but fortunately I didn't do that. And the ice machine works. So it's like truly amazing for that 30 bucks, but I had to wait a long time, but I'm pretty proud of myself.

RYAN (33:11):

So we’ve been playing a lot of Vanilla Ice songs around here the last day or so, because it's, it's really, really exciting. So, Jeff, the final thing we're going to talk about in the podcast today is again, some changes. There are some changes ahead and how we are looking at particular sectors here at LPL Research. I'll let you talk for a while because I feel like I've talked a while here about ice. We've upgraded small caps relative to large caps. Sort of build on that a little bit.

JEFF (33:36):

Sure. Yeah. I think we've expressed some increasing optimism towards small caps on this call. You know, over the last several months, we officially upgraded them in September of last year, but it's really been kind of warming up since then. They tend to work well coming out of recessions early in bull markets. So that's one piece of it, but we've also seen the earnings trajectory really improve nicely. And so, you know, they were looking a little expensive at times last year, a lot of people were talking about how a lot of small cap companies don't have any profits, right? Well, the profits have really come through and they actually look reasonably priced now to us based on price to earnings ratio. So the combination of where we are in the economic cycle and the strong earnings performance over the last several months, it makes us comfortable here with, with that upgrade. And certainly knowing we have a lot of confidence that this economic cycle is going to continue while we just talked about that durable, economic expansion should be good for, for small caps here, you know, potentially for the rest of the year and even into 2022.

RYAN (34:44):

Yeah. And let's not forget, right. Small caps had their largest gain ever in the fourth quarter. And I honestly forget what the exact number was, but just huge gains, enormous gains in the fourth quarter. So it makes sense that the first quarter, first part of this year, has kind of been sideways, maybe been a little choppy, maybe even a little bit of relative weakness. Honestly, you kind of want that after a big rally, catch your breath. We do you think small caps have caught their breath and potentially the second half of this year, again, as the expansion continues. And with those strong earnings small caps very well, like they did in the fourth quarter, can take the baton from large caps. Now, Jeff, breaking it down and looking at the  11 S&P 500 sectors there. We made a couple of changes. What were those changes?

JEFF (35:27):

Yeah. So you can see here if you're watching, the healthcare arrow down, the real estate arrow up, so healthcare we're downgraded and negative. It's, it's really more of a technical analysis based call. The sector's just been very disappointing in terms of the performance, charts don't look good. Real estate is kind of the opposite. Real estate, more of an early or maybe a reopening play than healthcare is so with real estate we're starting to see better performance, which is good. And then the benefit of the reopening we think can help as well. So just going up to neutral, not one of our favorites but certainly the outlook is brightening there.

RYAN (36:07):

Absolutely. I mean, again, I never, I don't know, I didn't think of real estate like a reopening play, but then you realize, and all the offices and all the malls and all the strip malls, all those things as we get out there. But like, again, there's some relative strength taking place there under the surface. The last several months with real estate really taking the baton and it's, you could argue real estate is more of a defensive sector. I mean, I wouldn't disagree to that. You know, it is a little more defensive. So if you think, you know, hey, after, you know, year two of a bull market, historically, it's usually higher. We talked about that, oh, a couple months ago or so, but historically year two's much more volatile and maybe the summer months we talked about “sell in May, go away”. Maybe we could be due for at least a sideways consolidation, maybe even an outright little pullback, maybe a defensive area that maybe you could you know, kind of you know, stay for a little bit is the real estate area, which again looks much better than it did before. Jeff, so, you know, maybe in two or three minutes, you know, on the, on the left side, on the YouTube channel, we've got like the cyclicals, right? Those are the defensive areas. We talked about healthcare staples, real estate utilities. What, how we kind of positioning on the cyclical side of things?

JEFF (37:08):

Yeah, you've got a little more cyclical value there. You know, when economic growth accelerates and inflation rises, you would expect certainly those parts of the economy to do best. And also they're the areas that were hit hardest by the pandemic, right? So that's, you know, materials and financials, energy was certainly hit hard. You can throw them in that category too. Although we prefer materials and financials, industrials, you could put in that category too, you know, airlines are in industrials. I don't know if any industry was hit harder by the pandemic than the airlines. So we think you want to lean into those sectors and then you know, put less emphasis on the defensives like utilities like consumer staples and healthcare, which we just mentioned.

RYAN (37:56):

Yeah. Great, great, great points there. So Jeff, we've got a minute or two left or so I know this week's a lot calmer, it seems like, and probably just jinxed it by saying that. By the way, last week four of the five days had at least a 1% move, we had a couple of 1% drops and then a couple of 1% moves to end the week. So starting to see a little more market volatility, if you will, but what's on, what's on your horizon this week that might, if not move markets, at least something we're going to be watching and talking about?

JEFF (38:23):

Yeah. Well, two things. I mean, first you have to mention the Fed, right? We're going to get the Fed minutes. So maybe there'll be something interesting in there. But remember those minutes are coming out too late to reflect the CPI and the weak jobs number. Well, and the retail sales miss. So it probably won't be as interesting as some people might hope that it is. And then number two you know, we're going to get probably a Republican proposal on the infrastructure side. So there, you might get some media attention on that if, if they can do a bipartisan deal, it's possible that although the, maybe the odds of that are below 50/50, but if they do get a bipartisan deal, maybe you don't have to get as many tax increases to pay for the next piece. So that'll be interesting to watch.

RYAN (39:15):

Absolutely. Yeah. That's no, we'll see. I mean, hey, if, if we get a deal, it'll probably be the number one thing we talk about on the podcast next week. So lots of back and forth in Washington there. So Jeff, at this time, we are winding down this week's LPL Market Signals podcast. Thanks to everyone who continues to listen to this. If you like it, want to help us, give us a like, give us a follow, give us a positive review. If you can, wherever you get your favorite podcasts. We'd appreciate that. Thanks to Neil, as always, our producer for making this the top quality, Jeff and I need all the help we can get. So he makes us look good and sound good so thank you to Neil and thanks everyone who continues to listen to it. Jeff, I'll see you next week and we'll give I don't know, maybe I'll know what my MRI said. Maybe I'll give an update on my MRI on my back. Because I'm sitting in this chair, it’s not too comfortable. I'm about ready to stand up. So we'll see everybody next week. Thanks Jeff. Talk soon guys. Bye-Bye.