Market volatility in spades this week! On Tuesday, markets were all a-twitter (oops, can’t use that word!) over the large and unexpected rise in April’s retail sales (+0.8%). That sparked a +2.0% rally in the S&P 500. What market commentators neglected to mention was that, when adjusted for price increases, the “real” number was negative (see chart above – red line).
On Tuesday, Fed Chair Powell said that they would continue to tighten financial conditions until “we see inflation coming down,” and that it might not be easy and could come at the expense of a higher unemployment rate. “You’d still have a strong labor market,” he said, “if unemployment were to move up a few ticks. I would say there are a-number-of plausible paths to have a soft, as I said, softish, landing.” Note the reference to higher unemployment and the use of the word “softish” instead of “soft” indicating that the Fed might not be able to tame inflation without issues for the economy.
On Wednesday, then, markets took Powell’s words to heart and the S&P retreated -4.0% and the DJIA fell more than a thousand points (-1,165), clearly now beginning to recognize the reality of the “R” word. Volatility continued on Thursday, with markets fluctuating between gains and losses, finally closing to the downside with the S&P 500 edging ever closer to “Bear Market” territory (more than 20% down from its peak). Then on Friday, more volatility with markets deep in the red most of the day, only to finish near the flat line. At one point, the S&P 500, was down -2.3%. If it had closed there, the fall from the high would have been -20.6%. But, there was a rally into the close, and as the table below shows, it remained in “Correction” at -18.7%.
No Control Over Supply
We note here that the Fed has no control over the supply of goods/services. It only has influence over demand via the jolt that interest rates have on demand and the impact of money printing on the financial markets. The biggest worry that we have, and we suspect similar worries on the part of other market participants, is that supply issues continue to push inflation to higher levels, especially events like total city lockdowns in China, and rising oil and food prices due to real or perceived shortages (Russia).
As a result, in order for the Fed to achieve its 2% inflation target, it would have to impact the 80% of the economy that is not energy or food based. That, according to Wall Street Economist David Rosenberg would require a deep recession (-3% GDP contraction) and a rise in the unemployment rate to 7%. Under those conditions, expect a deep “Bear Market.”
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