"The more persons and events one observes, the wider one's experience, the more one must conclude that few enjoy real happiness for long without some complementary source of unhappiness. This is especially true in the stock market, and, as well, in this thing we call life.” - Sherman Dahl, Pretium Capital Group
Inflation and Recession:
A new reality for Investors - and double the trouble.
Inflation data on June 10 sent stocks on a downward spiral. Inflation for May came in at 8.6%, a new 40-year high compared to the inflation of 8.3% recorded in April. As a result, the S&P 500 dropped 2.91%, the Dow declined 2.73%, and the Nasdaq crashed 3.52% last Friday due to higher-than-expected inflation numbers.
One of three indices is already in the grip of a bear market, Nasdaq: Down over 30% from its 52-week peak. The S&P 500 is down 19% from its 52-week high, while the Dow is down slightly over 15% from all-time highs. A bear market occurs when an index falls over 20% from its 52-week high.
Is this the end, though? Has inflation peaked?
Unlikely, says RSM Chief Economist Joe Brusuelas. In an interview with Yahoo Finance, he said, “We should not really be talking about a peak here until the price of oil and gasoline roll over.”
One thing that all analysts are certain of is that the US Federal Reserve is going to hike rates aggressively to combat inflation. Whether that will be a continuation of the 50-basis point hike or will the Fed adopt a more aggressive ploy remains to be seen. The first indication could come when Fed Chairman Jerome Powell speaks on Wednesday.
Is a recession in the offing?
The US Fed has a tough choice to make. If it increases rates too fast, it could risk a recession. If it doesn’t, inflation will continue to rise. Additionally, several tech companies, including Microsoft and Tesla, have spoken of hiring freezes or layoffs.
The 2-year Treasury yield is inching closer to the 10-year yield. If the 2-year crosses the 10-year yield (which is called an inverted yield curve), a recession is all but guaranteed.
Crude oil prices continue to remain high. Crude oil closed June 10 at $120.47, up over 58% in 2022. Energy prices have also risen rapidly, the most since 2005. Gas prices have been up 4.1% since April, fuel oil zoomed 16.9%, while natural gas prices were up 8%.
JPMorgan analysts have said that gas prices could hit $6 a gallon and possibly move higher. It’s a line of through Brusuelas seconds. He said, “There’s ample room for the price of oil and gasoline to move higher under geopolitical tension this summer.”
It's quite possible for equity markets to move lower in upcoming months due to challenging macroeconomic conditions.
IWA is a shareholder of Outcrop Silver & Gold
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