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Monday, June 13, 2022
Many times in my career in financial markets, I’ve been able to spot trainwrecks before they happen.
The trade-off for devoting every waking second to studying markets, the human beings involved in them, strategic planning in my kitchen, and crunching a whole lot of numbers, has been seeing these events coming down the pike.
So without hesitation, I am confident in saying we are headed to a potentially dark place for the stock market within the next 12 months (and yes, we will climb out of this dark hole). I say this with a level head and no ulterior motive — I have nothing for sale: I’m just one market observer looking into the future and seeing a host of converging problems. I am not long stocks, nor am I short stocks.
If this hot take worries you, it should. In fact, let this free newsletter today serve as a wakeup call. What you do from this point forward is up to you, of course. But what you should be doing at this critical point in time is assessing why you are even in the stock market to begin with, what your financial goals are, and how mentally strong you are to ride out a possibly rocky next twelve months.
And best believe this: There is more brewing than downside risk to quarterly earnings from Walmart (WMT) because an average gallon of gas now costs more than $5 nationwide.
Workers make their way past stacks of television sets in Element Electronics’ warehouse, before they are shipped, in Winnsboro, South Carolina May 29, 2014. REUTERS/Chris Keane
5 Problems Facing the Stock Market
The Fed is your foe: The Fed will likely jackup interest rates by 50 basis points later this week, and signal more increases like this are on the way as it tries to stomp out wallet-busting inflation. The next problem here: whether the Fed shifts to outright restrictive interest rate policy. “Up to this point [Jerome] Powell has dodged whether the Fed will need to go restrictive. We think he will now embrace the SEP [summary of economic projections] idea that odds are the Fed will need to impose moderate restraint, though it does not need to lock that decision today,” said EvercoreISI strategist and former NY Fed employee Krishna Guha in a new note to clients. Either way, the Fed is now in the mode of sucking the life out of the stock market rather than pumping it with drugs as it has been doing pre-2022. With that will probably come a further reckoning for markets.
Inflation is spreading: One overlooked aspect to last week’s super hot inflation read is price increases broadening out beyond goods. The economy is now facing a double barrel inflationary headwind: the cost to feed and house your family is rising alongside a surge in the cost to travel or eat out. And once more, this reinforces what I said above about the Fed being your foe. “The rotation of inflationary forces away from goods and towards services that has clearly occurred over the last few months of data is an even more unwelcome development for the Fed,” pointed out Citi economists led by Veronica Clark in a note to clients.
Slow-moving Wall Street: Consider this not-so-fun tidbit from FactSet. From March 15 through June 10, 417 companies in the S&P 500 cited the term “inflation” during their earnings calls, almost three times the five-year average of 155. In fact, this is the highest number of S&P 500 companies warning about “inflation” on earnings calls going back to at least 2010, says FactSet. And how have analysts responded? They haven’t: earnings estimates have continued to be relatively stable. This sets the stage for a second quarter earnings season of surprising disappointments with inflationary pressures at the core. Revision trends to start June are in line with May, notes strategists at Citi. Citi says the resiliency in earnings estimates is “surprising” in the face of inflation, China lockdowns, and geopolitical headwinds. Agreed.
Unsold stuff piles up: With economic growth having slowed, many companies are beginning to feel the effects in the form of bloated inventories. This will be a major issue for retailers such as Target (TGT), as well as its vast network of suppliers. And excess inventories are not just a retailer issue — this challenge is being faced by companies in computer hardware to packaged foods having trouble selling at inflationary prices. “U.S. business inventories are now above the pre-pandemic trend; inventories for Russell 1000 consumer names have risen by more than $80 billion since the end of 2019, led primarily by retailers. Risks are rising as momentum in goods-led consumption may be waning and stimulus is reversing,” said Evercore ISI strategist Julian Emanuel in a new note.
Paralyzed leaders: In the current environment, there is largely not much leaders can do to fix the issue of surging inflation and waning consumer confidence. The Biden administration isn’t going to propose a fresh round of stimulus checks, as that would only add fuel to the inflationary fire and is unlikely to have any shot at being passed. Gas prices have continued to climb despite various short-term attempts by the administration to arrest the problem. So they are paralyzed. Meanwhile, the Federal Reserve is unlikely to hint at cutting rates until 2024, let alone suggest it will pause its current pace of rate hikes. And lastly, business leaders are paralyzed because they are bumping up against the levels where consumers will not spend “X” more dollars on a good or service.
And on that note, enjoy your morning coffee. Happy Trading!
What to Watch Today
No notable reports expected for release.
No notable earnings expected for release.
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