Quote of the Week
“The greatest gift that you can give to others is the gift of unconditional love and acceptance.” – Brian Tracy
Last week was an awful week for the equity markets. The loss in the equity markets ranged from -1.81% for the Dow to -3.51% for the Nasdaq. This downward movement is typical for Quad IV.
The unusual movement which is not typical for Quad IV was the increase in long term interest rates. We are not concerned. We are also not surprised due to the media’s obsessive focus on gasoline prices. We have the headline Inflation Cycle peaking in Q1 of 2022 at 7,73%. We have an initial Disinflation of Peak Cycle Inflation to 7.24% in Q2 of 2022. Plus, we have headline CPI (Consumer Price Index) slowing towards 6.48% and 5.45% in Q3 and Q4, respectively. If you look under the hood, you will see the start of a decline in prices in many of the many ingredients that make up the Consumer Price Index.
I hear you when you say that you saw on TV that inflation is going to the moon. But guess what, that prediction has embedded $120 Oil and Nickel going to the moon. Today, Oil is already -20% lower and breaking what we call immediate-term Trade support of $100.98/barrel.
Our nowcast is that inflation will fall faster, especially in Q3 and Q4. And if the Fed tightens seven times into that with GDP slowing sequentially from 7% growth in Q4 of 2021 towards 0% growth, then you are going to keep seeing some serious DEFLATION in equity prices and credit market interest rates.
We anticipate going deeper into Quad IV at least through June. We are still primarily positioned in U.S. Treasuries, Gold, Energy, and Utilities.
One of the leading indicators of the economy’s direction is Consumer Sentiment. Due to the fact we are headed into a deep Quad IV, this should come as no surprise. The following article from The Real Economy Blog illustrates this thought. https://realeconomy.rsmus.com/chart-of-the-day-consumer-sentiment-slides-amid-energy-shock/
Chart of the day: Consumer sentiment slides amid energy shock
MAR. 11, 2022 BY TUAN NGUYEN
Consumer sentiment slid further in March, falling by 3.1 points from February amid spikes in oil and gasoline prices. The University of Michigan sentiment gauge dropped to 59.7, an 11-year low, according to data released Friday.
The decline was only slightly lower than our forecast of a 3.2-point decrease in sentiment as oil prices soared almost 40% in the past two weeks amid geopolitical tensions.
Oil prices, though, have fallen significantly, from $123 to $106. But that decline was not included in the most recent consumer survey.
The sentiment index often follows changes in oil and gasoline prices. As more Americans have felt the pain at the gas pumps, sentiment continued to deteriorate for the third month in a row.
Skyrocketing energy and commodity prices also sent inflation expectations for the next 12 months soaring, to 5.4% from 4.9% in February. Consumers are expecting higher inflation but only temporarily as the 5- to 10-year inflation expectations remain anchored at 3%.
One interesting component of the survey concerns how consumers feel about retiring. That number dropped to its lowest point since 2016 as higher prices ate into savings and retirement funds. That will most likely give some of the millions of recent early retirees a reason to return to the labor force.
Despite lower consumer sentiment, spending intentions improved slightly for major household items and vehicles in early March, while buying a house seemed less attractive.
But the big picture remained unchanged: Inflation and supply chain issues continued to cause spending intentions for home and vehicles to decline, falling to a four-decade low.
We should expect a modest improvement in consumer sentiment in the final report for the second half of the month if oil prices continue to fall, and if uncertainty, as captured in the VIX index, continues to decline from its peak this week.
If the energy and commodity shocks prolong, such a deterioration in sentiment will translate into lower spending in the coming months.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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