This is not 2018

Stocks closed lower yesterday, unable to escape the gravity of inflation fears. The ECB is poised to end its decade-long QE and follow the path of the inflation-fighting Fed.

What goes bump in the night. Let’s get it out of the way first. We are still in the midst of a pandemic. To date, the US has had 85,214,036 confirmed cases. Since the beginning of the year, confirmed cases have risen by some +54%, however, most of that leap came in the first quarter of the year which spiked by +46%. Since the end of the first quarter, cases rose by +6.3% in what appears to be a steady, but not spiking, climb. OK, so yes, COVID is still a very real thing. Despite its being ever-present and still quite deadly, COVID has largely left the psyche of the markets. Gone are the fears that the US is going to lock down the country in a 2020-style shuttering. Also fading are those outdoor, shed-style seating areas that lined the once-nearly-abandoned city streets. Sure, there are those draconian Shanghai lockdowns that spooked the markets a few weeks back, but the spook was more related to the possibility of increased supply chain snarls which may lead to more inflation. The reality is that COVID, as a market influencer has fallen far down the leader board. That is why you may note that sometimes I use the term “post-pandemic” in my notes. Sure, the globe is still in the midst of a pandemic, but markets, at least at this point, view it as something far passed.

So here we are, post-pandemic, and I find myself writing all too often about the Federal Reserve and its rate hiking potential. I find myself watching industrial metals, crude oil prices, and employment numbers. Further, I am constantly on the lookout for negative forward guidance from companies, and I am expecting to see some negative growth in year over year earnings. I am closely monitoring the spread between 3-month, 2-year, and 10-year Treasury Bill and Note yields. The 2/10 spread briefly turned negative in April, which, by many, is considered an early warning signal for a recession. Wait, WHAT YEAR IS THIS AGAIN? With COVID filtered out, a lot of this feels like business as usual for 2018. The Fed was aggressively tightening and selling bonds (Quantitative Tightening, or QT) while earnings were shrinking, and many were concerned that the US was headed for a recession after a record-long expansion. I hate to do this, but do you remember the S&P500 losing some -14% in the final quarter of 2018, largely in reaction to the aforementioned drivers? Sure, you do. You may also remember that the Fed, in response, quickly shifted its stance from hawkish to dovish. That helped markets turn around and the Fed ultimately began to cut rates in the summer of 2019.

This is 2022, post-pandemic. The Fed is tightening and planning yet more tightening. The S&P500 fell by around -9% this quarter after losing nearly -5% in the first quarter. That’s just about -14% year to date if you were wondering. Recession fears are swirling about and just about every day another company seems to be announcing a hiring freeze, with some even announcing layoffs. This would seem like a great time for the Fed to get ahead of things and become dovish. The problem with that is, unlike in 2018, the US is experiencing inflation not seen since the 1980s. Crude oil is on the climb, now above $120 a barrel. Gasoline in New York is now over $5 a gallon for the first time… ever. I’ll save you some time on the mental math, that is $100 to fill a 20-gallon tank! The national average for unleaded gasoline is slightly lower at $4.95, which is…um, also high. Forget about why it is so expensive or whose fault it is…energy costs are out of control. Industrial metals are at or near highs as well. Copper, necessary for all things that go “beep”, is just below its all-time high. Grains, necessary for all things that go “crunch” are also near records. Wheat prices are the highest they have been since futures began trading in 1958. So, with the pandemic in the rearview mirror, it is indeed, business as usual, except with an unusual twist: inflation. It is no wonder that the market is so obsessed with what the Fed might do next. The FOMC will meet next week and is largely expected to hike its key lending rate by another +50 basis points. Tomorrow we will find out if inflation, still quite high, may have moderated, when we get the Consumer Price Index release from the Department of Labor Statistics. It is not 2018, but rather post-pandemic, on-edge about everything, high-inflation 2022.

YESTERDAY’S MARKETS

Stocks fell under the weight of inflation fears and a potentially aggressively hiking Fed. The S&P500 fell by -1.08%, the Dow Jones Industrial Average dropped by -0.81%, the Nasdaq Composite Index traded lower by –0.73%, and the Russell 2000 Index declined by -1.49%. Bonds fell and 10-year Treasury Note yields gained +5 basis points to 3.02%. Cryptos fell by -2.25% and Bitcoin gave up -3.67%.

NXT UP

• Initial Jobless Claims (June 4) is expected to come in at 206k, higher than last week’s 200k claims.
• The Treasury will sell $19 billion 30-year long bonds.