Inflation is proving to be far more tenacious than financial markets had hoped.

The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981.

The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine has a significant influence on food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported:

“The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy (natural gas, coal, crude oil), fertilizers, and some grains (wheat, barley, and corn).”

With inflation rising, the Federal Reserve will continue to aggressively raise the federal funds rate. There is a 50-50 chance the Fed will raise rates by 0.75 percent in July (rather than 0.50 percent), and some economists say there could be a 0.75% hike this week when the Fed meets, reported Scott Lanman and Kristin Aquino of Bloomberg.

Mortgage rates jumped sharply this week, as fears of a potentially more aggressive rate hike from the federal reserve upset markets.

The average rate on a 30-year fixed mortgage rose 10 basis points to 6.28% Tuesday. That followed a 33 basis point jump Monday.   The rate was 5.55% one week ago.

Rising rates have caused a sharp turnaround in the housing market.  Mortgage demand has plummeted.  Home sales have fallen for six straight months, according to the National Association of Realtors.  Rising rates have so far done little to chill the red-hot home prices fueled by historically strong, pandemic-driven demand and record low supply.

The inflation news unsettled already volatile stock and bond markets. Major U.S. stock indices declined last week as investors reassessed the potential impact of higher interest rates and inflation on company earnings and share prices, reported Randall W. Forsyth of Barron’s. The Treasury yield curve flattened a bit as the yield on two-year Treasuries rose to a multi-year high, reported Jacob Sonenshine and Jack Denton of Barron’s. The benchmark 10-year Treasury Note finished the week yielding more than 3 percent.

There was a hint of good news in the report. The core CPI, which excludes food and energy prices because they are volatile and can distort pricing trends, is trending lower. It dropped from 6.5 percent in March to 6.2 percent in April and 6.0 percent in May.

The Federal Reserve’s favored inflation gauge is the Personal Consumption Price (PCE) Index, which will be released on June 30.

A bear market occurs when stocks have declined in value by about 20 percent or more. Investing during a bear market can be a lot like playing baseball for a team that’s in a slump. Your teammates are worried, hecklers distract the players’ attention, and the team’s record of wins and losses moves in the wrong direction. You might find yourself beginning to question whether playing baseball is right for you.

Here are some interesting statistics for coping with bear markets:

Remember, downturns don’t last forever.
The Standard & poor’s 500 Index has experienced 8 bear markets over the last 50 years and recovered from all of them, reported Thomas Franck of CNBC. Here’s a rundown of the duration and returns of bear and bull markets since 1973.

Year          Bear market         Total return                Bull market          Total return   
1973          21 months             -48 percent                  74  months            +126 percent
1980          20 months             -27 percent                  60  months            +229 percent
1987          3  months              -34 percent                  31  months            +  65 percent
1990          3  months              -20 percent                  113 months           +417 percent
2000          31 months             -49 percent                  60  months            +102 percent
2007          17 months             -57 percent                  131 months           +401 percent
2020          1.5 months            -34 percent                  21 months             +114%
2022          5 months to date   -22 percent                  TBD                       TBD

As you can see from the chart, bull markets tend to last far longer and generate moves of far greater magnitude than bear markets. Time after time, bear markets have proven to be good buying opportunities for long-term investors.

The current market conditions, as further compounded by the Russia/Ukraine war, as well as interest rates and inflation skyrocketing, have produced an environment unseen since ‘73/’74.  All the benchmarks for stocks and bonds are double digit negative.  The only asset class producing YTD positive gains is commodities: energy, food and grains, and metals.  I DO NOT SEE one good reason for the overall markets to not continue to fall further.  We will most likely be adding a SPXS and SQQQ positions (benefiting as the markets go down) to our investment models. 

A recap of 2022 YTD symbols:

The Good, The Bad, The Ugly

S&P 500  -21.63%
DIA  -16.29%
COMPQX -30.79%
IJH, MID CAP 400 -19.75%
IJR, SMALL CAP 600 -18.67%
IWM, RUSSELL 2000 -23.86%
GLD, GOLD –1.33%
SLV, SILVER -9.81% 

What is working:

UNG, natural gas +96.64%
UGA, gasoline +81.47%
USO, oil +63.08%
XME, metals and mining +6.41%
WEAT, wheat +45.74%
CORN, corn +32.36%
CANE, sugar +2.39%
JJA, agriculture +25.55%
JJE, energy  +94.01%
JJG, grains +31.67%
JJN, nickel +21.89%
SPXS, 3 X short SPY +72.65%
SQQQ, 3 X short QQQ +114.38%

Talk with us.
During market downturns, investors often panic. That causes some to want to sell investments and incur losses that may be difficult to recover. If you’re tempted to sell, give us a call. We’ll discuss your concerns, review your portfolio and help you decide on a course of action.

Weekly Focus – Think About It
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
—Peter Lynch, former portfolio manager