Monday Musings: May 10, 2021

May 10, 2021


Public Trust Credit Team

Talks of inflation are taking notice

In their Q1 2021 earnings calls, Ball Corp., General Motors Co., The Clorox Co., and Kimberly-Clark Corp. all mentioned or addressed inflation concerns. Data provided by Bloomberg reveals that S&P 500 companies have discussed or mentioned inflationary pressures more times in the first quarter of 2021 than any quarter since Q2 2019. Presently, inflation has been cited 785 times during first-quarter earnings presentations compared to 730 times in the second quarter of 2019. Leading the discussion surrounding inflationary pressures are the industrials, consumer staples, and consumer discretionary sectors with discussions including increased freight and transportation costs as well as a material increase in the price of pulp. Some corporate names expect to pass these increased costs to the consumer with Kimberly-Clark and Procter & Gamble planning price increases on their consumer tissue products starting in June and September, respectively. However, some companies like Ball recognize not all of these costs will not be passed to the consumer, potentially impacting margins down the road.
Discussions surrounding inflation also appear to be drawing attention from investors. Questions about whether inflation may increase faster than once thought are being discussed after the $1.9 trillion American Rescue Plan was passed earlier this year. Additional long-term economic packages proposed by the Biden Administration to the tune of approximately $4.1 trillion between the American Jobs Plan ($2.3 trillion) and the American Families Plan ($1.8 trillion) have drawn concerns that the U.S. economy is possibly overheating from the massive proposed stimulus. The inflation narrative also drives the question of when the Fed may alter its views regarding raising interest rates. Treasury Secretary Janet Yellen was quoted in the Atlantic last week saying that “it may be that interest rates will have to rise somewhat to make sure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy.” Treasury Secretary Yellen then said on Tuesday that she doesn’t “think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address them.” Markets will continue to monitor discussions surrounding inflation when CPI figures are released later this week.

Q1 earnings show strong performance and de-leveraging but markets appear to have caught up

U.S. companies have mostly finished reporting earnings for Q1 and the results are good. According to research by Bank of America, earnings were up ~50% year-over-year while revenues were up 13.5%, a very strong performance considering most companies did not feel the brunt of the pandemic until Q2 2020. It is no secret the economy is improving at a brisk pace, setting up very favorable comparables for companies moving into the second and third quarters. A key earnings takeaway is that investors were prepared for such favorable results; companies like Apple that posted exceptional results still saw their share prices decline while investment-grade markets only saw small spread tightening over the last two weeks. Investment-grade investors should still be happy after the earnings season as net leverage trended down below pre-COVID levels, a very positive sign given record debt issuance in 2020. We expect IG companies to have a very favorable Q2, likely similar to this quarter’s performance; however, we do expect the market is now wise and will be expecting very good results.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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