There’s an old saying that goes “Weathermen were invented to make economists look good”.

Last week we learned that inflation (as defined by the CPI) rose 6.8% over the prior twelve months.  This was the highest reading since June of 1982, and it was much higher than expected.

If we strip out the new and used vehicle prices and the (volatile) food and energy prices the ‘core’ CPI still registered +4.9% vs one year ago.  Not quite as bad but still more than double the Fed’s target number. This data supported Jay Powell’s official retirement of the word ‘transitory’ from the Fed-speak, to no one’s surprise. Inflation has remained elevated longer than the Fed had expected, obviously, but we really need to look at the timeframe related to the issue.

With the supply chain problems and the resulting shortages we didn’t expect inflation to disappear magically in six months. And it didn’t.

Certain costs are ‘sticky’  — notably wages and housing. Once these costs go up, especially if they go up sharply, they aren’t likely to fall any time soon. So big business has an effective ‘free pass’ to raise prices on just about anything at this time and can blame it on inflation. We haven’t seen this kind of environment for a very long time.

So, it’s pretty easy to argue that SOME inflation is likely to hang around for a while. Perhaps a long while.

But at the same time, isn’t this what the Fed has been working toward for over a decade? I don’t think we need to get our shorts in a knot over inflation in the 2.5 to 3% range. And history suggests that used car prices don’t tend to rise – ever: or at least, in this case, for very long. Soon (a relative term) we expect enough semiconductor chips to meet auto makers demand, and this situation is likely to fade away, right?

I believe we can apply the same argument to most anything that is being priced higher because of “supply chain issues”. From a macro point of view, if there is more demand for a product than there is currently available supply, someone, somewhere will figure out a way to meet that demand. Over time, of course.

So where am I going with this? Stocks actually rose last week in the face of the ‘worst’ inflation print in 20 years. Why? Because this is likely the beginning of the end of the inflation surge. Or, in other words, I believe that we are likely near the peak on the inflation front.

And then there’s the fact that many folks may have bought stocks or covered shorts because the inflation numbers weren’t worse. Like so many things in the world of economics, this may look quite different six months further down the timeline.

Ron’s Market Minute — Did We Say Volatile? 

What a week! And I know that I’ve said that more than once this year, but wow, what a week! 

Wednesday was the best Fed Day market session in over a year. The S&P Index* rose 1.6%, erasing losses from the previous two sessions, and ended up two points away from an all-time high. That upward move came despite the central bank’s most hawkish policy pivot in years (as it looks to clampdown on inflation. The pace of tapering will be doubled to $30 Billion a month, with further reductions in the new year. Interest rate projections are now updated to show a median expectation of three hikes in 2022. 

SO why were stocks going up? In a word, much of the uncertainty regarding the Fed moves has been removed. Remember that markets hate uncertainty. In the eyes of investors (especially those who watch the daily gyrations of their portfolios) it’s an assurance that the Fed is looking seriously at inflation. Powell also gave us a strong dose of optimism by confirming that ‘we’re making rapid progress toward maximum employment.’

And then there was Thursday. With blaring headlines regarding the latest twist in the Covid saga, tech stocks once again took it on the chin. 

It’s pretty common for Fed-meeting days to pull the markets one way of the other, and it’s usually unwound within the next few days. So here we are. Volatile as can be as we move into what is (in a normal sort of world) a very positive few weeks in market-land. I’m expecting more positive movement but am not holding my breath and there will still be bumps in the road.  

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
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www.denkinvest.com

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