Lingering Effects

Lingering effects.  Stocks slipped yesterday, pausing from their ascent to fresh highs, as investors re-evaluated, once again, the risks of the Coronavirus.  Stock investors are still not sure if this latest leg up in the market is justified but they remain cautiously optimistic.

 

N O T E W O R T H Y

 

Too rich for my blood.  Inflation is a word bandied about quite a bit by lawmakers, central banks, and… OK I admit it… me.  Inflation can be a tricky thing, but many investors and, quite frankly, average consumers hardly think about it these days.  Investors, whose attention spans seem to be ever-diminishing, are hardly worried about inflation affecting their yields (even though real yields are low to negative in some cases).  Come on, someone out there has to remember the 80’s where hair and inflation were high, high, high.  The 1980’s began with inflation between +10% and %13%.  That’s right, a gallon of milk would have cost you $1.12 in 1980 and somewhere around $1.40 a year later.  That may not seem like much, but if you were on a fixed income… and you liked milk… you might have struggled to make ends meet.  Speaking of fixed income, 2-year treasury yields were as high as 14.63%! The Fed was aggressively trying to slow down inflation by raising rates, which also spiked in 1980 to 17.5%.  What happened next? A recession.  The Fed then aggressively lowered rates causing yields on the 2-year note to drop to around 9%.  The point here is that… first of all imagine getting 9% return on a risk-free 2-year treasury… inflation was so high at more than 10%, the real return on those bonds was still negative!  The recession was over by July of that year but inflation was still rampant and the Fed got back to fighting it by aggressively raising rates once again, and wouldn’t you know it, the economy slipped into another recession by late-summer of 1981 and lasted through the fall of 1982.  By 1983 price increases calmed down and settled in between +4% and +5% where they lasted through the remainder of the 1980’s.  Inflation reared its head once more in the beginning of the 1990’s where it spiked as high as +5.5% and fell in the following years, closing out the decade at around 2%.  That is pretty much where it stayed until today, with a few minor spikes and dips along the way.  So nothing really crazy in twenty years, and that probably explains why most investors yawn through inflation reports.  Consumers, well, I kind-of covered them yesterday: easy credit ensures that they don’t have to worry about not affording a gallon of milk… although most people don’t really drink that much of it these days (most people are either lactose intolerant or on a low fat diet). That aside, economists like to look at price inflation in a number of ways.  One important way is to compare it to wage growth.  If prices are going up and wages are going up proportionally, then things should be fine, in theory.  If the price of a Venti Caramel Macchiato with Almond Milk (and whipped cream) goes up by +2% and your salary is going up by +3%, you probably won’t notice. But if your daily hand-crafted coffee price continues to go up and your wages stay the same… things could get rough.  Yesterday, the Bureau of Labor Statistics announced that the Consumer Price Index grew by +2.5% year over year compared to last month’s reading of +2.3%. They also announced that Real Average Weekly Earnings (that factors in inflation) were flat year over year for a second straight month.  Prices are going up but salaries struggle to keep up.  Time to consider downsizing to a Grande, perhaps.

 

THE MARKETS

 

Stocks slipped yesterday as Coronavirus cases jumped on the heels of a slowdown-driven rally in the prior sessions.  The jump was largely expected by healthcare industry professionals when China changed its screening criteria, but investors were caught off guard.  The S&P500 dropped by -0.16%, the Dow Jones Industrial Average sold off by -0.43%, the Russell 2000 climbed by +0.26%, and the NASDAQ slid by -.18%.   Bonds were up and 10-year treasury yields fell by -2 basis points to 1.61%.

 

NXT UP

 

– Retail Sales are expected to have grown by +0.3%, same as last month.

– Industrial Production may have slipped by -0.2% compared to a -0.3% pullback last month.

– University of Michigan Sentiment is expected to have fallen slightly to 99.5 from the last reading of 99.8.

– Cleveland Fed President Loretta Mester will speak today.

– Next week will be truncated due to markets being closed on Monday for President’s Day. Earnings season is winding down and we will get housing numbers, PPI, Markit Manufacturing PMI, FOMC Minutes, the Leading Index, and some regional Fed reports.  Check back on Tuesday for details.

 

daily chartbook 2020-02-14