Jay Powell and the Fed are being as about straight forward as they know how to be: Signaling a hike here, not so much of one there, supposing a pause, and inferring more hikes. The market is wound a little tight these days so you can’t blame them for padding around like restless cats.
Jamie Boivin, who runs the research arm at Black Rock can afford to be a little more candid: “Central banks can always bring inflation back to 2% if they really want to, but it would require too much of a demand crush to bear.” The man isn’t wrong. Boivin also predicted inflation will ultimately settle a 3-4%. Which isn’t a bad point either; the forces that constrain supply and boost demand are working against that 2% target.
The labor market is tight, unemployment rising but low. Wages are rising faster than inflation, which is slowing but high. Demographic trends will continue put drive up wages. Supply chains are no longer disrupted, but they are being redirected and, in a trend away from globalism, replicated locally. A rally in stocks have broadened out from the Big Tech boom in the first half of the year. All of which is confounding the Fed’s efforts rein in inflation to a scant.
Diversity across something as huge as the stock market makes it inherently more stable. When all the gains rally around a niche driver, the danger as is that they choke off investment elsewhere as the profit hype gets out of control. As it is, the S&P500 is up about 17% across the index. Jay Hatfield, chief executive of Infrastructure Capital Management told the Wall Street Journal : "we're in a goldilocks economy."
Which is usually what top minds say before we all get kicked in the teeth.
There are rumblings from the analysts of a disastrous Q2 earnings rolling in over the next couple of weeks. Some of the more extreme estimates are calling for a drop in earnings per share of a whacking 8%. The culprits are those rising labor costs as well as some shrinking in demand. Americans seem to have rediscovered our taste for crushing amounts of debt, but with rates rising, those payments are going bite. They’re certainly going to suck.
Folding in all the data has always been a little like reading the coffee grounds, but what are we to make of these strange indicators are no longer playing with each other in predictable patterns? We aren’t. The active ingredient is Volatility – that quant euphemism for chaos. And higher interest rates tended to make more of it. It’s price volatility that gives both business and consumers so much hell.
Sure, stock prices generally trend over inflation in the long haul, but that doesn’t do you much good when your portfolio is taking a beating right now. If you can stomach commodities – you probably shouldn’t – it isn’t a bad asset class to own in a period of high inflation because it acts as an inflation hedge. And in a low growth situation – combine the two and you get “Stagflation” the returns on commodities have been about 10% historically. Tread lightly there, pardner.
As confusing as it all is, investors that haven’t really been kicked in the teeth in 15 years have faith. The price of inflation linked treasuries are consistent with an average inflation rate of 2.1% over the next five years and 2.3% for the five after that.
Wouldn’t it be pretty to think so?