For all of 2022, the Fed has been doing their best to increase rates to try and get inflation under control. It looks like we're starting to make some progress as inflation is slowing as seen by today's report and to some degree, the past few reports.
Markets Rejoice!
But not so fast. A reduction in the month to month inflation is great and something that in the long run will be good. But what does inflation coming in below expectations mean for stocks?
A lower rate of inflation means that there are either less than expected dollars chasing the same amount of things, or it could mean there are more things out there with the same amount of dollars. Either way, it means that some or all companies could see less revenue increases or even lower revenue than estimated if we start to see deflation throughout the economy.
If the above happens, we'll start to see the next leg down in the market as earnings compress. I obviously don't have a crystal and can't say for certain it will happen but based on the Fed's actions, I personally think we haven't gotten out of this bear market quite yet.
Here are the reasons why I think we're likely to see that happen next:
- Real average hourly earnings increased only .5% MoM and are DOWN 1.9% YoY (per the CPI report
- Food prices rose .5% MoM and are up 10.6% YoY (I would argue this is a good that is not super elastic)
- Shelter costs are up .6% MoM (again, I would argue this is not a super elastic good)
- The price of goods like used cars is down 2.9% MoM and services like medical services cost declined .7% MoM.
All that is to say that we're starting to see people making less, spend less on goods and services, while continuing to spend more on goods that they HAVE TO spend on, ie shelter and food; potentially giving them even less disposable income to spend on other things.
Furthermore, from Powell's last FOMC speech, he made it clear that the markets are not fully pricing in how high rate hikes could go and that they are not likely to stop/reduce them anytime soon.
In my opinion, only when we start to see the unemployment rate go up markedly can we assume that the bear market is likely at the end, as the fed stops and reduces rates and companies start to increase their earnings again.
In the mean time, I've been continuing to add tech, especially the big boys such as aapl, amzn, googl, etc. I don't how much further we fall or if we even fall at all but I do think Big Tech is still the way of the future.
With that said, I think whatever recession and earnings decline we see will be mild to moderate as far as stocks are concerned due to many of the big player's strength coming out of covid.
Leave a Reply