Daily new infections for Covid-19 reach a high in the US on Friday (254,680, December 18th). And yet, the stock market continues to march upwards. The information technology index hit new highs propelling the S&P 500 up to a fresh record on Thursday.
The success of chip designers is perhaps one of the US technology industry’s biggest strengths. Taiwan is the world’s leading chip manufacturer, but the confluence of software and chip design companies suggests the US will dominate the global technology industry in 2021.
Whether that is enough to push the S&P 500 up to new highs next year depends in part on the trajectory of inflation expectations. In recent years, the strong gains in tech stocks have gone hand in hand with enduring perceptions of low inflation. The two are mutually reinforcing.
There are, of course, bottlenecks, and these will fan rising inflation expectations. The break-even inflation rate for 10-year Treasuries rose to 1.95% on Friday. Reports of shortages for key electronic components, delays in shipping (pushing container costs up sharply) reflect potential, short-term inflation risks. Wages are rising too for many workers in the so-called ‘gig’ economy.
However, these risks need to be set against the very reasons why chip designers are outperforming. The huge growth in idiosyncratic chips will yield big advances in technology that will drive costs lower across society. The rise in inflation expectations may be a short-lived, ‘cyclical’ recovery following the pandemic recession, but nothing more.
Summary
• Wave 3 of Covid-19 ignored by equities
• US benefitting from enduring strengths for tech
• Inflation expectations will rise, but cyclical, not secular
