THE WEEK ON WALL STREET A higher-than-expected inflation report triggered a sell-off on Friday, leaving stocks in the red for the week. The Dow Jones Industrial Average lost 4.58%, while the Standard & Poor’s 500 dropped 5.05%. The Nasdaq Composite index slid 5.60% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, declined 1.81%. INFLATION UPENDS STOCKS Stocks gyrated between gains and losses last week until sliding lower on Friday’s hot inflation report, which heightened worries over a more aggressive Fed and a further economic slowdown. Stocks moved higher to begin the week, despite rising bond yields, a profit warning from a major retailer, and Senate testimony by Secretary of Treasury Janet Yellen, who said that inflation was likely to remain elevated. Stocks turned lower later in the week on renewed concerns of an economic slowdown, sparked by a downward revision in The Federal Reserve-Atlanta’s real-time estimate of second-quarter GDP growth and a drop in new mortgage applications. Investors lightening up on stocks ahead of Friday’s inflation report may have also contributed to Thursday’s selling. INSIDE INFLATION Consumer prices rose 8.6% year-over-year in May, marking the highest rate since December 1981. Price increases over the last 12 months were driven by a 34.6% jump in energy prices and by food costs, which climbed 10.1%. Used car and truck prices, which had seen three straight months of declines, rose 1.8% from April, while airfares soared 12.6% in May. May’s inflation exceeded economists’ forecasts and dashed the hopes that inflation had plateaued. In a separate economic report on Friday, real wages (net of inflation) fell 0.6% in April and were lower by 3% from 12 months ago. THE WEEK AHEAD: KEY ECONOMIC DATA Tuesday: Producer Price Index. Wednesday: Retail Sales. FOMC Announcement. Thursday: Jobless Claims. Housing Starts. Friday: Industrial Production. Index of Leading Economic Indicators. THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS Thursday: Adobe, Inc. (ADBE), The Kroger Co. (KR). Markets are in full risk off mode as this is being written. There is a lot of inflation and interest related data coming out this week. None more important than the Fed meeting on Wednesday where they will raise interest rates by at least a half percent. Many are calling for more given the hot inflation number we saw on Friday. However, the Fed probably doesn’t want to be seen as panicking over inflation either. Whatever they do, the market will be hanging on their every word. There is data showing breaks in inflation in some areas of the economy, but food and energy are still red hot. In our instant gratification society, we want prices down right now. Unfortunately, it doesn’t work this way with monetary policy. At this stage we are trying to turn a battleship. It will turn. It does take time though. I haven’t seen or heard sentiment quite so negative for quite a while now. Maybe back to 2008. Historically sentiment can be a good contrarian indicator, but I suspect we aren’t there just yet. Remember, markets turn before the economy turns. In both directions. Morgan Housel, in his essay “Too much, Too Soon, Too Fast” wrote, “A good summary of investing history is that stocks pay a fortune in the long run but seek punitive damages when you try to be paid sooner. Virtually all investing mistakes are rooted in people looking at long-term market returns and saying, ‘That’s nice, but can I have it all faster?’”
definition of invest is to devote (one's time, effort, or energy) to a particular undertaking with the expectation of a worthwhile result. The word "devote" in that definition is where we as humans struggle. Ask anyone who has been married for 50 years. I'd say they stayed "invested" and I'll bet they'd tell you it was worth it. Above we mentioned inflation being the highest since 1981. Well, in the summer of 1982, when inflation finally began to cool, the market turned on a dime and ran hard for 5 years straight. I’m not saying that’s exactly what is going to happen exactly the same. But, there will be one morning when inflation begins to cool and markets, once again, look beyond. Once you start thinking along these lines, you may decide that the real risk here isn’t being in the next 20% decline. It’s being out of the next 100% advance. In that case, being "invested" and "devoted" is going to pay off. The pivot point this week will be on Wednesday with the Fed. The battleship will turn eventually, no matter how rocky the seas may seem.
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THIS WEEK'S UPDATE
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June 13, 2022
