It's that damn inflation, it's so hot right now!
It's that damn inflation, it's so hot right now!
What the Market? - Mar 21, 2022
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What the Market?
As we know, Mr. Market is a complex emotional being. While Twenty-Twenty-Too is off to a rocky start to say the least (or the 4th worst in history to say the most), Mr. Market has still managed to release some tension and smile a bit. The Fed officially raised interest rates and at least some of the uncertainty weighing on the market has been relieved as the markets have broached positive territory for March.
What’s driving the market?
Episode IX: Rise of Interest Rates: For the first time in nearly three years and roughly two years after the Fed floored interest rates, the Fed announced a 0.25% hike. If that doesn’t sound like much, that’s because it’s not. The real interest rates (adjusting for inflation) are still quite negative. This means that the current rate hike is still a far cry away from making any significant changes to the current economic structure. For the time being, let’s hold off on the imminent recession signs. The Fed will need to continue monitoring inflation amid growing geopolitical risks, a damaged supply chain, and the easing of pandemic measures. It doesn’t help that consumer confidence and investor sentiment continue dropping. For now, the Fed has revised economic growth targets down, and provided guidance for the remainder of the year. Powell will continue to raise rates to combat rising prices but this won’t be over anytime soon. Give it some time, and don’t be shocked if inflation hits 10% before things improve.
Let’s talk about housing data: Home prices are up 15% YoY and just logged their 120th consecutive month of rising prices. It shouldn’t be too much of a surprise that home sales fell 7.2% in February. With 30 year fixed mortgages rates rising above 4% for the first time in nearly three years and increasing inventory rotation (speed at which homes are sold) creating a shortage of homes, it’s quite likely that home sales will continue to drop as prices increase. Not to blame boomers, but willingness to pay any price for a house in a context of low inventories and stupid-high prices may have something to do with what’s going on. Cheers to yet another year of renting (as if we had any other option)?
What’s an investor to do?
Portfolio Management
Markets hate uncertainty more than anything. The Russian invasion of Ukraine, rising inflationary pressures, and price increases in conjunction with an often sensationalizing media may make it seem like the economic world is collapsing. Well, it’s not. Although the backdrop is grim, the current economic actions being taken are adequate and the economy is generally running well.
Yes, overall market risk has risen (and will likely continue to remain high) and speculative stocks are plummeting (and will likely continue to wane in the coming months). The Fed injected the market with more stimulus than Jose Canseco injected into his ass to keep the market swinging (pun intended). As Canseco too learned, these measures are useful in the short-term but they also encouraged further degenerate activity in the form of meme stocks and amateur day-traders. Now that the anabolics and easy home runs are fading from the market, growth stocks are understandably crashing. High beta (volatile/speculative) stocks which had been outperforming the market are returning to more rational prices.
The tale of the tape remains the same for now; when uncertainty takes the wheel, it’s best to buckle up. In other words, safety first. The goal right now is to limit losses, consider flight-to-quality investments that will let you sleep at night and preserve your value. That doesn’t mean you can’t seize the opportunity to jump on a strong growth or tech stock that was dragged down by the market. However, do your homework and make sure it has a solid financial foundation - it’s easy to make money in an economy that’s juicing on Fed stimulus. The easy, pick a hot company phase, is coming to end. Consider looking into some less sexy, niche businesses that you rarely think about (e.g., airplane parts, grocery stores, or medical devices). It’s time to put the work in and properly evaluate a company.
Emerging Idea: As EU nations look to reduce their reliance on gas in the wake of sanctions against Russia, keep an eye on where they are turning their attention to. It’s likely that they will increase investments in green, renewable energy.
Keep an eye on the economy
Johnson Redbook Index report on Tuesday: The Redbook index tracks YoY same-store-sales from a sample of about 9,000 US retailers. It provides insights into changes in consumer spending habits and will be a good index to monitor the impact of inflation on consumer spending.
See here for the full economic calendar
The Curious Investor
No deep-dive this week
Upcoming Earnings
What we’re vibing:
Gordon Ramsay with some easy breakfast recipes: When he’s not screaming at pathetic excuses of seemingly professional chef’s (at least per his yelling), Ramsay has his own cooking channel. He’s actually quite calm, and his energy is captivating. If you’re a big breakfast fan like us, his YouTube channel is sure to spark some tasty ideas.
Salsa with a view: Just a cool salsa performance for the dance fans reading. Now to figure out how to pull off some of these moves…
Think Fast: Name one friend that could be better with their finances and investments! Great, now hit the share button and help them out! :)
Resources
A content guide to investing (books, books, books!)
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