Stocks sold off yesterday as traders were just not convinced that inflation has peaked. End-of-quarter rebalancing accentuated market moves, closing out the worst quarter for the S&P500 since Richard Nixon was in the White House…ouch.
Battle at mid-way. The midpoint of the year typically comes and goes without too much fuss. In the US, folks are focusing on their Independence Day plans, wondering where to catch the best fireworks show, what type of hot dogs to throw on the grill, or whether to take a drive to some scenic destination with the family. But this year is different. According to the latest inflation figures, out just yesterday, you will have to pay +48.5% more to fuel up your family car than last year. At those prices, you might decide to fly to your destination instead…until you realize that airline tickets are +32.5% higher than last year. Well, looks like a staycation may be your best alternative, though still not as budget friendly as it would have been last year. For the cookout, meat will cost +14.8% more, fresh veggies will be more expensive by +6.6%, and if you want to wash it down with a good pint of beer you will have to dig +4.8% deeper into your pocket. Has that got you down? Take your mind off the pocketbook pain and fantasize about that new house you have been thinking about. With the lockdowns behind us, more homes should come back on the market and possibly make them more affordable. Sorry, according to the Federal Housing Finance Agency, house prices are +18.76% higher than they were last year. Oh, and compliments of the Fed, a new 30-year fixed mortgage will sport a rate of 5.83% according to the latest live figures. If you are a glutton for pain, you can pick up your favorite financial press where you are likely to find the word “recession” somewhere on the front page, if not right on top.
That’s right, as a consumer you are facing lots of reasons to rethink just how, or even if, you are going to spend your next dollar. Though it sounds uncanny, the Fed, tasked with combating inflation, is happy about your financial, emotional state. You see, all the increased consumer demand in the recovery played a big role in getting inflation to where it is today. Beyond hot demand, supply chain problems pushed prices even higher. If consumers are fearful and begin to pull back on their purchases, prices will eventually come down, but the side effect would be reduced economic growth and possibly recession. In anticipation of all this pain, markets have been under intense pressure since late last year, and that pressure only increased as the worst-case scenario began to play out before our very eyes. Markets struggled to factor in the mounting pile of bad news with the end results being a -20.6% year to date drop for the S&P500. Is that bad? It sure is, and it is not normal either. The last time we experienced a half-year drop like that Richard Nixon was in the White House, The Beatles broke up, Elvis Presley was still the king, Twiggy was a fashion icon, and Krazy Glue was introduced. For you kids out there, that was a long time ago, 1970 to be more exact.
So, it is no wonder that markets are so tumultuous, and that can impact consumer behavior as well. Studies have shown that consumers are less confident when the stock markets are going down, even if they don’t own any stocks. So, this year all the fireworks associated with Independence Day are going off inside the stock exchange…and they are not celebratory. Markets have fully factored in an ongoing, aggressive Fed and continued inflation. That pain may be behind us, but the market is now struggling to factor in the potential for recession. Bond markets have already begun to send signals of anticipated economic weakness as longer maturity Treasury Note yields have pulled back in recent weeks, though they are still considerably higher than they were last summer. For the second half of the year, optimists are hoping for inflation to moderate and for the economy to remain buoyant. Corporate earnings season will kick off in 2 weeks’ time, and that certainly has the potential to reveal some surprises. The Fed’s FOMC will also meet later this month and is largely expected to hike its key lending rate by another +75 basis points. It looks like it is going to be a hot summer. In 1970, the summer was also a hot one with average temperatures slightly above normal. The stock market recovered through the year end, and wouldn’t you know it, the most popular song on the radio was “Bridge Over Troubled Water.” Indeed, I am humming that tune right now.
YESTERDAY’S MARKETS
Stocks traded lower yesterday as economic jitters continued to keep investors on edge. The S&P500 traded lower by -0.88%, the Dow Jones Industrial Average fell by -0.82%, the Nasdaq Composite Index dropped by -1.33%, and the Russell 2000 Index declined by -0.66%. Bonds advanced and 10-year Treasury Note yields fell by -7 basis points to 3.01%. Cryptos dropped by -6.99% and Bitcoin lost -7.66%.
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