Economy
A key inflation reading came in quite a bit higher than expected this week. The Producer Price Index (PPI) measures wholesale inflation that producers of goods are experiencing, and there's a clear link between PPI and the Consumer Price Index (CPI) - the price consumers pay for goods and services. The February PPI reading came in at a month-over-month increase of 0.7% vs. expectations for 0.3%. Year-over-year, the PPI is reading 3.4%, the highest reading in over a year. Bear in mind that the higher-than-expected inflation report is from last month, prior to the Iran war, when oil was roughly $70/barrel. With oil now above $100, there are growing concerns that we'll see an acceleration of inflation. This will surely complicate the job of incoming Fed Chair Kevin Warsh who was widely expected to begin cutting rates this summer. That narrative has completely been flipped on it's head over the last few weeks. Looking at the CME FedWatch tool (which looks at how bond traders are pricing in future changes in interest rates), there's now an implied ~25% probability that the Fed will raiserates before the end of the year.
Markets
The losing streak continues for stocks as we hit 4 straight weeks of selling. Despite early optimism in the week around the prospects of oil shipments through the Strait of Hormuz, the reality of a drawn out conflict reset expectations, and the S&P 500 finished 1.9% lower for the week ending March 20. The S&P 500 has fallen nearly 7% since the attacks began a few weeks ago. The longer the conflict goes on, the greater the risk to corporate profits which had been trending higher for the last few years. Higher prices at the pump wear on consumer sentiment, and we've been reliant upon a healthy consumer to drive stocks higher. It may take time to see this play out in the data, but when a larger percent of household spending goes to pay for gas, that's money that could have or would have been spent elsewhere in the economy. In addition, as transportation costs rise, costs on goods could also accelerate.
There's not a lot of good news out there right now, and that's reflected in sentiment. The CNN Fear and Greed Index is flashing Extreme Fear. If you're looking for a positive spin on this, readings of Extreme Fear have historically portended higher-than-average market returns over the following year. Markets climb a wall of worry and there's a whole lot of worrying going on at the moment. That's not to say we're out of the woods, but these types of markets are where the equity risk premium is earned by disciplined investors.
What We're Reading
- Taxes are a Team Sport- The Joint Account
- Investors Don't Need to Win the World Series- Tony Isola
Have a great weekend.
Dogwood Wealth Management