Continuing my point last week on REAL vs NOMINAL returns in stocks, the
happy, go lucky days of the 2nd half of the 1990’s was best described
with the famous buzzword ‘goldilocks,’ with the connotations of strong
growth and low inflation with the Maestro running the show. The
combination allowed P/E multiplies to rise at the same time earnings
growth was healthy. The situation we’re in now has the potential for
growth being much more highly correlated with trends in inflation
(specifically commodity inflation) if the action in the past 2 1/2
months is any indication as the recent run in stocks has coincided with
a rise in both commodity prices and inflation expectations. Coincident
with the CRB index rallying today to the highest level since mid Nov,
the implied inflation rate in the 10 yr TIPS is rising to 1.94%, the
most since Sept 22nd. With interest rates moving higher as a result,
earnings growth will have to carry more of the weight instead of
multiple expansion in dictating the direction of stocks.
