It was another week of declines, punctuated by a few reasons for hope. The world is in a very different place than it was just two years ago. However, this week I am not going to repeat the many reasons we are in the current situation. You get the week off. Instead, I want to focus on a few data points that may suggest the declines may be nearing an end. It is worth noting nothing goes straight up forever, but perhaps more comforting is the idea that nothing goes straight down forever either.
The market selloff these past six weeks looks to have done enough to bring down prices to a level where investors can buy a little in anticipation of intermediate-gains. With the Nasdaq deep into bearish territory, and the S&P 500 quickly approaching it, we are beginning to see some support. Even in very difficult markets such as 1994, 2000, and 2018, the selling can get overdone. The indicators suggest a summer rally could make up some losses from here. The decline so far in 2022 is based on fear of the Fed and its economic impact. A possibly summer rally is based on a near-term oversold condition and the view the Fed’s actions are currently discounted. It is possible we see another pullback in the fall based on higher interest rates, however it will be contingent on the Federal Reserve’s actions. In 1994, the market recovered to close the year flat, while in 2000 it kept moving lower. The key to a positive outlook, and how the year ends, depends on whether the coming economic data slows enough to allow the Fed to talk down interest rates and allow for less restrictive tightening.
Perhaps the best piece of data we received this week is that for the first time since August 2021, inflation has started to retreat. It is too soon to call March the peak, but if April’s decline holds it could signal an end to inflation spiraling out of control. The Consumer Price Index (CPI) rose 8.3% y/y versus the prior 8.5% in March. I know this doesn’t feel especially good, nor is it a substantial drop. However, this is the first indication that the Fed’s monetary tightening is having the intended effect. For stocks to regain traction, it will likely require a second consecutive drop in CPI (month-over-month) for investors to recover confidence. A second decline could lead to a softening of Fed rhetoric and accordingly, a shift of market expectations to less aggressive interest rate hikes later in the year.
On the topic of confidence, it is worth pointing out consumer sentiment is very weak now. The University of Michigan reported this week that the U.S. Index of Consumer Sentiment fell to 59. You may be wondering why this is good news. Hear me out. Consumer confidence peaked at 88 in April 2021 before falling precipitously. It has only been slightly lower in April 1980, November 2008, and briefly in August 2011 going back to 1952. Most of this negativity can be attributed to inflation as the sentiment index is an assessment of one’s current financial situation relative to a year ago. The correlation between very low consumer sentiment and the stock market being oversold is not a coincidence. As sentiment inevitably recovers, so too will the stock market. As inflation continues to fall, people will begin to feel better about the future, and will be more willing to invest in what it will likely be seen as an oversold market. The tide will turn.
In closing, I turn to a product that I will admit I have occasionally wanted. Despite their now-commonplace nature, both toothpaste and orange juice are relatively modern concepts. Colgate first released toothpaste in the 1890s, with the currently formulation arriving sometime around 1945. Meanwhile, until the 1920s, most Americans didn’t drink much orange juice. It wasn’t until the 1930s when orange juice became the U.S.’s second most popular breakfast drink behind coffee. However, as we all know toothpaste and orange juice just don’t get along. An ingredient called sodium lauryl sulfate (SLS), a cleaning agent and surfactant, is responsible for causing orange juice to taste gross after brushing your teeth. Experts at Tropicana have come up with a new toothpaste. Tropicana toothpaste was designed specifically to protect the taste of orange juice by not including SLS. Unfortunately, this was a limited release and I am a bit late to bringing this information to you. The toothpaste went on sale last November and is presumably long sold out. However, just knowing it exists brings me hope. Now you know.Bruce J. Mason, MBA