Week Ending July 15, 2022
Another tumultuous week in the books for the roaring twenties.
I’ve been vocal about my stance that we’re in a recession already for several months now. And I find it interesting that we’re now at a point where the media, in a frenzy, has finally caught up to what’s going on whereby using the word ‘recession’ more times over the last month than in the last decade.
I recall a friend giving me a hot investing tip about crypto currency late last year: “when your grandma starts asking ‘which crypto currencies to invest in’ you know the bull run is almost over”. I might allude you to the same when it comes to this recession – now that every single media outlet is consumed with, and calling for, a recession… Perhaps it’s just about over?
Only time will tell. Hindsight is surely 20/20. But in the meantime, let’s allow the numbers to lead us to our ultimate conclusions. Having said that, I am calling a bottoming for the S&P 500 in the coming months – with the S&P 500 bottoming out around 3500 – about 9.25% lower than it is as I type this. A discernment I’ve reached via my technical analysis, as well as, the continued flow of fundamental shifts we’ve been seeing in the economy. Again, I’m sure hindsight will be 20/20 – but I would be getting ready to ‘buy the dip’ if you haven’t already – and yes, that is financial advice.
Below is your Weekly Market & Economic Update – I hope you find these updates helpful. I’m always glad to receive your feedback on how we can make these more informative for investors.
Warmly,
Mark Sauer
info@AllOneWealth.com
+1(310)355-8286
Charts of the Week
Energy & Food’s Effect on CPI, Corporate Profits Vs. Inflation & The Velocity Of Money (M2)
Market Update
Global Equities, Fixed Income & Commodities
Global Equities: It was a mixed week for stocks as hot inflation data and a lackluster opening round of earnings reports caused stocks to sputter. The S&P 500 lost –0.9% during the week, while the Nasdaq was down -1.6% and the Dow Jones Industrial Average outperformed with a -0.2% dip. Developed International markets lost -1.5% and Emerging Markets fell -3.6% as Chinese Covid restrictions weighed on economic growth data.
Economic Update
Inflation, Rate Hikes & Bank Earnings
No Inflation Relief: Both the Consumer and Producer Price Indices continued to show accelerating inflation, although the trend could reverse next month as most of the inflation stems from energy and core readings excluding food and energy appear to be moderating. Headline CPI touched a new 40-year high in June, at 9.1% year-over-year, while Producer Prices were 11.3% higher than a year ago. The Fed’s preferred inflation measure, the Core Personal Consumption Expenditures Index, will be released at the end of the month, after the July Fed meeting.
Charts of the Week
Energy & Food Prices Effect on CPI
Our first Chart of the Week is a five-year chart of the annual percentage change in the Consumer Price Index (Blue line) alongside the same index ex-Food and Energy (Red line). The widening gap between the two inflation measures demonstrates the outsized impact of energy prices in recent months. With energy prices declining in July, we anticipate this gap should narrow, and possibly lead to moderating or even contracting headline inflation readings in the coming months.
Pre-tax Corporate Profits Vs. Producer Price Index (PPI)
Corporate profits have been growing at unprecedented rates, and inflation in producer prices has risen sharply as well. This FRED graph below helps us compare the two and briefly discuss their relationship.
Pre-tax corporate profits (shown by the blue line) increased by 51% between the fourth quarter of 2019 and the first quarter of 2022. During the same period, producer price index (PPI) inflation in manufacturing rose by 21.2% (shown by the red line).
Why would this matter? PPI inflation measures changes in prices producers receive for their products and prices other producers pay for those products as intermediate goods in their own production. During the COVID-19 pandemic, supply chain disruptions contributed to an increase in the price of these products. And yet, corporations seem to have passed through enough of these intermediate costs onto the consumers of their final products to see record profits and large profit margins. Make no mistake, we’re not just experiencing inflation – we are experiencing corporate greed via price gouging at every level.
Velocity of Money – M2
Our final chart shows the ‘velocity of money’ (M2) which is the frequency at which one unit of currency is used to purchase domestically, produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
M2 offers a more comprehensive overview of inflation levels because if the M2 monetary supply is increased, inflation could rise. Equally, if M2 supply is restricted by central banks, inflation could fall.
Additionally, the frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money.
A slight reduction in M2 during this time of ramped inflation would be ideal, however, as shown below (2022’s brief recessionary time period represented by a grey bar), times of massive M2 reduction correlate directly to recessionary periods.
