Infatuation with Inflation
Doug Walters
Inflation was top of mind for investors again this week. But despite the negative newsflow, there are some signs of hope for those willing to look.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
Inflation has become the new cryptocurrency. On the golf course this week (a rare event for me), the buzz was all about inflation. There was, thankfully, not a peep about crypto, NFT art, MEME stocks, or SPACS. Those fads may not have passed for good, but their fall from grace has coincided with a fall from the conversation. The void has been replaced with an infatuation with inflation.
If you want to lose an hour, have a look at Google Trends. You can type in a term like “Inflation” and see how frequently it has been searched over the past few years. Interest in inflation is trending up, while searches for shiny objects (like crypto) that have lost their luster are trending down. This week’s release of the Consumer Price Index (CPI) inflation number likely garnered even more Google searches. Inflation is undeniably high, and so is the interest in it.
As we look toward the future, the path of the stock market is unknowable. We could just as easily be in the 3rd inning of this downturn as the bottom of the 9th. But with the gloom around inflation in the media these days, it would be easy to conclude the game has barely started.
Warren Buffett is famous for recommending: to be “greedy when others are fearful.” While we are not advocating greed, we believe that fear is currently overdone. To offset some of the fear, we take a minute to highlight a few inflation silver linings in this bear market.
- CPI may be the highest in a few decades, but Core CPI (ex-food and energy) has fallen for the third month in a row.
- Gasoline prices, a significant contributor to the high CPI, have decreased in recent weeks, raising the possibility of a better print next month.
- High prices have yet to cripple the economy. Retail Sales reported on Friday were up 8.4% year-on-year, indicating consumers are still willing to spend despite the higher prices.
We are not out of the woods with inflation, but there is a chance we just saw peak inflation in June. Time will tell, and in the meantime, investors should avoid fear and sit tight in a well-diversified portfolio built to weather this storm of uncertainty.
Retail Sales Growth
Retail Sales reported on Friday were up 8.4% year-on-year, indicating consumers are still willing to spend despite the higher prices.
Headline of the Week
US stocks ended the week down modestly despite a Friday rally. Earnings season kicked off this week, but inflation stole the headlines once again with the release of the Consumer Price Index (CPI) data.
- CPI came in with a year-on-year increase of 9.1% in June. The increase compares to the 8.6% reported for May and analysts’ expectations for an 8.8% increase.
- Core CPI, which excludes food and energy, was up 5.9%.
- The last time inflation was this high was in the early 1980s. At that time, inflation was coming down from a peak of over 14%.
But there is a silver lining.
- Core CPI fell for the third month in a row, having peaked at 6.5%.
- Gasoline prices, a significant contributor to the 9.1% print, have decreased in recent weeks.
- High prices have yet to cripple the economy. Retail sales are up 8.4% year-on-year, indicating consumers are still willing to spend, despite the higher prices.
The Week Ahead
Fed watch, overseas rate hikes, and blue-chip earnings will dominate the news flow next week.
Bank on it!
European Central Bank, Bank of Japan, and Peoples Bank of China all are on deck for rate decisions next week.
- With the latest growth numbers coming short of the central planners’ target, it should be no surprise that China’s Central Bank has stayed out of the hike parade and is expected to keep rates unchanged this time.
- Bank of Japan also is staying away from raising rates for now. However, the Yield Curve Control program is what the markets will pay attention to.
- European Central Bank is expected to increase its rate by 0.25%, but there are odds (25%) that it could be 0.50%.
- As we have learned, Central banks have been less predictable recently, so more significant moves than anticipated will cause volatility and unease.
- Any guidance for future actions will be important, so extra attention will be paid to press conferences that follow the meetings.
Big and Blue
Earnings kicked off the previous week; however, next week picks up steam with blue-chips Goldman Sachs (GS), Bank of America (BA), American Express (AXP), health care conglomerate Johnson & Johnson (JNJ), and Abbott Labs (ABT). Netflix (NFLX), IBM (IBM), AT&T (T), Verizon (VZ), and Tesla Motors (TSLA) all start filling in the real economy results.
- The giant global companies will shed light on the strong U.S. Dollar’s impact on sales and earnings.
- This earnings season will show who has the strongest brand and has been able to push rising costs down to the consumer.
Fed Watch
For investors, this is the top-rated reality show of the summer… in two weeks, will the Federal Reserve hike rates by 0.75% or 1% before they take August off?
- Will the Purchasing Mangers’ Index (PMI), Housing Data, or Weekly Jobs report this week provide the data needed to make the magnitude of the rate hike less unpredictable?
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