Market Strategy 6/13/2022
- June 13, 2022
Too Much, Too Little, But Likely Not Too Late
An uptick in Friday’s inflation data sent stocks lower on extreme negative sentiment
Key Takeaways
- Last week’s CPI inflation data spooked markets stateside and across the globe as US inflation reached yet another 40-year high. Investors will be focused on the Fed’s FOMC meeting to gauge the central bank’s level of concern about persistent inflation.
- Volatility in the markets is not likely to ebb until market participants can see positive effects from the Fed’s cumulative actions against inflation.
- Last week saw the US dollar surge against ten US trading partner currencies to stand near its highest levels of 2022.
- The 10-year Treasury yield ended last week at its highest level since 2018 as the bond market remains concerned about inflation. The yield is now about twice the level that it began the year.
The week ended last Friday saw a broad decline in stocks stateside and around the world. Emotions ran high across financial news networks as breathless recounting and commentary took place and even arguments broke out among some bulls and bears in what is normally a fairly civil landscape in “market-day prime time slots”.
At the center of last week’s drama (and what could remain at the center of any forthcoming turbulence) is the awful stickiness of high levels of inflation in the aftermath of a pandemic that at its peak pressure points caused monetary policy makers to force massive levels of liquidity into economic systems and politicians to flood the economic landscape (and their respective constituencies) with massive levels of fiscal policy support.
In essence, the US economy and a large part of the developed and even some of the emerging markets were flooded with liquidity in size, momentum and period of time. The torrent of liquidity dwarfed that issued during the Great Financial Crisis of 2007 and 2008 and reminded of the liquidity that is brought out in times of war.
In our view the stock market looks broadly oversold though with sentiment as dark as it turned last week the expression, “we may not be out of the woods yet” may likely still apply for now.
Considering where we were as a global community in April of 2020 it is difficult to fault the intent and the actions taken by the Federal Reserve and even those taken by the political community (which is not oft known for it its ability to spend taxpayer’s money frugally).
COVID-19 itself was oversized in its destruction compared with SARs, Ebola or Zika. The risk at hand in those days spread beyond that related to the health of the populace of the globe but as well to the risks it presented in how it might damage the global economy. The risk of a deep recession or even depression was not unreasonable consideration for those encumbered with decisions as to what needed to be done.
Some two and a half years later the effects of what came to pass during the reign of the pandemic stateside and elsewhere around the world is being felt, and felt in size. Vaccines of great efficacy have evidently stemmed the spread of COVID-19 and its variants allowing a process of serial economic re-openings (and some re-closures followed by further re-openings around the world).
While the memories of COVID-19 and the realization of the risks its variants pose remain fresh in many places, life has begun to resemble in some part what it was pre-pandemic. Demand has outstripped supply of goods and services and taxed the ability of the world economy to function without untoward levels of disruption.
And so for now global supply chain dysfunction and persistent high levels of inflation remain challenges for monetary policy makers, government officials, businesses, consumers and markets around the world to sort and navigate.
With all this already no easy task the Russian intrusion into Ukraine and China’s zero tolerance policy to outbreaks of COVID variants within its borders further compound the economic challenges faced by billions of businesses and individuals on a day to day basis.
Ahead of last week’s CPI (inflation) numbers stateside there were a few “great expectations” from some folks in the corners of the market thinking that the inflation number might have shown signs of enough improvement to relax a little but mostly expectations were for a number that would still be high and unacceptable but at least not worse than the prior inflation high.
We all know what happened. The inflation number came in worse than expected. Bears, skeptics, nervous investors and those prone to negative projection of outcomes of any change in monetary policy found another catalyst to sell “without FOMO” (fear of missing out).
By the end of last week the S&P 500 was just some 0.002% above the low it had reached in May.
In our view, the stock market looks broadly oversold though with sentiment as dark as it turned last week the expression, “we may not be out of the woods yet” may likely still apply for now.
It appears simply too early to expect the actions taken thus far by the Federal Reserve to have had much or even any effect on the high levels of inflation that hold the consumer, business and the markets hostage. With just two hikes (April and May) thus far (amounting to 75 basis points 25 in April and 50 in May) this week’s rate decision and likely more than a few rate decisions beyond that are likely needed to address what ails and threatens affordability of day to day life in 2022.
In what we believe may still be a secular bull market driven by longer-term trends empowered by advances in technology that have already dramatically changed our lives over the past decade and appear poised in the wings with more to follow--this week will find investors focused on the outcome of the Federal Reserve’s FOMC meeting announcement on Wednesday at 2pm. Keep the faith.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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