Inflation Assets

Macro Perspectives: Wed 31 Mar 2021

On the theme of higher prices, we know money has been plowing into "inflation assets." As we discussed last week, these assets consist of commodities, real estate, Treasury Inflation Protected Securities, EAFA (developed market international stocks), U.S. Banks and value stocks.

What has led the way, and what is lagging?

With risk backstopped by the Fed, deposits at record levels, credit at record levels, trading revenues booming AND the prospects for rising interest rates, the bank stocks have been crushing this year (up 24% on the KBW Bank Index).

Value stocks have clearly been working. The Vanguard S&P 500 Value ETF (VOOV) is up over 11% in the first quarter.

Real estate has been on fire. Demand is high and supply is low, and prices are soaring. This index that tracks prices in 10 U.S. cities is up 10% year-to-date!

For housing, not only do we have this dynamic of a pandemic-induced migration to certain areas of the country (sucking up supply - many times sight unseen), we have first time buyers coming into the market, incentivised by ultra easy credit and record high savings (bolstered by government checks), AND we have the inflation outlook, which is driving cash out of bank accounts and into houses. For the rich, they don't necessarily want or need a $50 million house on Palm Beach, it's simply a parking place for cash.

With all of the above, a supply/demand mismatch is running real estate prices higher and higher.

What about commodities? Commodities are up 10% year-to-date, but as you can see in this chart, a long-term trend change is underway. A new bull market in commodities has a long way to go (higher) - still a very good buying opportunity.

What about international stocks? On a relative basis, this has been a laggard thus far. The EAFA ETF (symbol EFA) is up only 4% year-to-date.