Wealth Watch: 3-Step Plan for Peace of Mind While Inflation and Recession Fears Grow

July 15, 2022

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From the desk of Vance Howard:

The inflation number yesterday was very hot up to 9.1, which is disturbing to say the least. Is inflation priced into the price of stocks and bonds? My answer is probably yes. BUT, what is not factored in yet is a recession. If we roll over into recession, bear markets sell off deeper and last longer, and I do not think that is priced in yet. Every day that goes by, the data is pointing to a recession. We have heard the word soft landing a lot, but if we roll over into a recession, I don’t see any way that we have a soft landing. I think we all might need a chiropractor to straighten us back out.

What investors need to watch is not all the data, not an economist (who are just about always wrong), but the trend of the market. It will tell you everything you need to know about how to trade/invest in any environment. The HCM-BuyLine® is negative, meaning the trend is clearly down. Don’t fight the trend as it’s a great way to go broke. We are sitting on a mountain of cash, possibly more than just about any firm on Wall Street, and when the trend turns back up, we will start buying deals at a fast pace. Until then, controlling emotions and being patient is the key to success.

Why is oil going down? Fear of a recession. What happens during a recession? Everything slows down, unemployment moves higher, and inflation attacks everyone’s buying power. Oil has dropped from about $125 a barrel to $95 a barrel, and this is strong sign that a recession could be on the horizon.

CPI inflation marches to its highest level since 1981. It has been another month of inflation marching higher, keeping the Fed on its aggressive tightening path. The Consumer Price Index (CPI) jumped 1.3% in June, the most since June 2005 and the second most since early 1980, surpassing the consensus of a 1.1% gain. The increase was broad-based across CPI categories, with energy a big part of the story. Energy prices advanced 7.5%, the second most since June 2009, with gasoline prices rising 11.2%, although a reprieve is likely coming in the near-term as crude oil prices peaked mid-month. Food prices increased 1.0%, at par with its six-month average which itself was at its highest level since December 1980.

Core CPI, which excludes energy and food, increased 0.7%, the most in a year, and above the consensus of 0.5%. Shelter, which is more than 40% of core CPI, increased 0.6%, with rents up 0.8%, the most since April 1986, and owners’ equivalent rent up 0.7%, the most since June 1990. While falling housing affordability and cooling housing demand will lead to slower home price growth, there is a significant lag before these developments are captured in the CPI statistics. We expect shelter to be a source of higher inflation for the rest of this year and likely into 2023. Other core components with notable increases included used cars and trucks (+1.6%), new vehicles (+0.7%), vehicle insurance (+1.9%), and medical care services (+0.7%). Among the few CPI components that declined last month were airline fares, off 1.8%, following three consecutive months of double-digit gains.

On a y/y basis, headline CPI inflation hit 9.1%, a new high since November 1981, and above the consensus of 8.8%. Core inflation eased modestly to 5.9% y/y from 6.0% y/y in the previous month, and above the consensus of 5.7% y/y. It is still near its highest level since 1982, but the fact that it peaked at 6.5% y/y back in March supports our assessment that underlying price pressures are receding, albeit too slowly for comfort. Core goods price inflation eased to 7.2% y/y from a peak of 12.3% y/y four months ago. Core services inflation, however, accelerated to 5.5% y/y, up from 5.1% y/y in the previous month, and the fastest pace since May 1991.

Provided that consumer preferences continue to shift back toward more services and fewer goods in the late-Covid era, continued mending of supply chains, coupled with a cyclical moderation in demand and unwinding of excess retail inventories suggests that the peak in core inflation will continue to hold. But at this point, even if inflation were to moderate, it is too broad-based, making a return to the Fed’s 2.0% inflation target elusive for the foreseeable future. In fact, the median CPI and the trimmed-mean CPI, which exclude outliers, ascended to 6.0% y/y and 6.9% y/y, respectively, both at new highs since data started in 1984. Similarly, the sticky and core sticky CPI measures from the Atlanta Fed also moved up to new y/y highs since early 1991. Although we expect inflation to moderate toward our projected range of 4.0%-4.5% by yearend, the breadth and stickiness of current price growth suggest that the Fed will continue to tighten aggressively this year, cementing a 75 bp rate hike later this month.

Vance Howard

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