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By Nicholas
Jasinski | Monday, March 7 Pain
at the Pump.
Fossil-fuel prices continue to soar, and investors are concerned about how
that will be felt in consumers' wallets amid already sky-high inflation
readings. The U.S. is considering
cutting off oil imports from Russia in retaliation for its
war with Ukraine. Price relief won't be here any time soon,
and the Federal Reserve could fall
even further behind the curve. The worst-case scenario is the central bank
needing to increase interest rates
faster to combat accelerating inflation despite a faltering economy. The Nasdaq Composite dropped 3.6%
today to fall into a bear market. The S&P 500 lost 3% and the Dow
Jones Industrial Average slid 2.4%. There was even more action in commodities
markets today. The U.S. price of oil traded as high as $130.50 a barrel,
before finishing the day below $120. That's still up almost 60% year to date,
and the highest for West Texas Intermediate crude
since 2008. Wheat futures traded in Chicago settled at
$12.94 a bushel today—up 68% this year to a record high, according to
Dow Jones Market Data. Prices of several metals produced in Russia have
soared as well. Even before the current run-up in commodity
prices, Morgan Stanley
strategist Mike Wilson
was already bearish on consumer spending in 2022. That makes up some
two-thirds of U.S. gross domestic product. "Fading stimulus tailwinds, high prices
across consumer spending categories, and negative real wage growth have all
driven this trend," Wilson wrote. "Now, an energy squeeze is being
introduced on top of those factors—a dynamic which will hurt the low-end
consumer, who spends more on goods than services, disproportionately." As for the impact of the Russia-Ukraine war
on corporate profits, there's no direct link. The S&P
500 generates less than 1% of its annual revenues from
Russia. The most exposed company in the index is cigarette-maker Phillip
Morris International, which had 11% of sales from Russia last
year, according to data from FactSet. Wall Street analysts continue to forecast
record profits for this year. "One important factor that has
differentiated the U.S. to it peers is that earnings have held up much better
and the profit outlook has remained positive," wrote Jefferies
strategist Sean Darby.
"2022 earnings growth was revised up after 4Q21 earnings season. The
U.S. nominal GDP boom from 2H20 to 4Q21 has been one of the strongest since
the 1950s." It's the soaring energy costs that could be
felt most severely—through increased raw materials, manufacturing, and
transportation costs or lower consumer spending. That's a potential
problem for companies with sales anywhere, not just in Ukraine or Russia.
Consumer discretionary stocks in the S&P 500 dropped 4.9% today, while
energy shares added 1.5%. A broad downturn in profits and the dreaded
"R-word" about the economy aren't part of the everyday conversation
on Wall Street right now. But there are more questions these days, and the
outlook is certainly some degree of worse than at the start of the year. "Prior to Putin’s war, the consensus
outlook for the economy was that while the Omicron wave depressed economic
activity during January, economic growth was likely to rebound as the
pandemic abated," wrote Edward Yardeni,
president of Yardeni Research. "Now we
see a more stagflationary outlook with persistently higher inflation and less
economic growth. A recession no longer can be ruled out given the latest jump
in oil prices." Yardeni dropped his year-end S&P 500
forecast to 4000 today, from 4800 previously. The new target implies a
roughly 15% drop for 2022. |
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DJIA: -2.37% to 32,817.38 The Hot Stock: Schlumberger +8.1% Best Sector: Energy +1.5% |
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