Medicare Agent News: A Wake-Up Call for Stocks

Monday, February 27, 2023

A Wake-Up Call for Stocks

By Connor Smith | Friday, February 24

Too Hot. U.S. stocks fell today after the Federal Reserve's preferred inflation gauge showed the central bank's battle with rising prices is far from over.

The Dow Jones Industrial Average fell 1%. With a 3% drop on the week, the Dow has fallen for four straight weeks, declining 3.4% over the span. This was the Dow's largest weekly decline since Sept. 23.

The S&P 500 fell 1.1%, and 2.7% on the week. The market benchmark has fallen in five of the past six trading days and for three straight weeks. It was the index's worst week since Dec. 9. The Nasdaq Composite fell 1.7%, bringing this week's decline to 3.3%. That's also its worst week since Dec. 9.

Prompting the selloff was the core personal-consumption expenditures price index, which rose 4.7% year over year in January. Economists had forecast an increase of 4.3%. The core PCE increased 0.6% from Decemeber.

Barron's Megan Cassella writes that reaccelerating consumer price growth is the latest sign that the economy is defying the Fed's attempts to cool demand. Megan adds:

The data sent stocks tumbling and sparked calls for a hefty half-point interest-rate hike when the Fed meets again next month. The latest inflation report also fueled further questions about why the economy has been able to remain so hot nearly a year into the central bank’s most aggressive monetary-policy tightening campaign in decades, defying widespread expectations.

The simple answer is that the Covid-19 pandemic changed the economy in so many ways that the traditional rules no longer apply. But the fuller explanation is more complicated. Here’s a look at some of the reasons why interest-rate hikes haven’t yet had the negative impact on the economy that both conventional wisdom and historical precedent would suggest.

Barron's associate editor Randall W. Forsyth writes that inflation expectations have risen since Groundhog Day in early February. That's come despite falling crude oil prices. Randy adds:

The year-over-year rise in the CPI has receded from its four-decade peak over 9% last September, largely because of declines in prices for goods. But services, which account for 61.8% of the CPI and were climbing at a 7.6% annual clip through January, haven’t peaked, [Bianco Research's James] Bianco says. This pattern is a virtual mirror image of the 1965-69 inflationary cycle, he adds, citing data from his former colleague, Ronald Griess of the Chart Store.

That’s not a positive for fixed-income investors. According to research by Paul H. Kupiec, a senior fellow at the American Enterprise Institute, those who bought and held 10-year Treasury notes from late 1963 to early 1973 were crushed by inflation. While the notes had a positive real yield, based on the then most recent 12-month CPI readings, that yield became negative as inflation went much higher over the notes’ 10-year life.

Over the near term, Treasury yields have significantly further to rise, even after their recent jump, according to Bianco’s analysis. In every cycle, he finds, the two-year note’s yield tops out above the eventual peak in the Fed’s funds rate target.

Randy notes that short-term Treasury bills could serve as a hiding place for nervous investors, along with money-market mutual funds, or short-term bonds.

A bond strategy report from BCA Research this past week also recommended TIPS as providing an additional hedge over conventional Treasuries. The 10-year TIPS break-even spread was priced on Friday for CPI inflation of just 2.39% over the next decade, the low end of its recent range of 2.3%-2.5%. Given what we’ve seen since Punxsutawney Phil popped his head up, I’ll take the over on that inflation forecast.

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