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Is inflation peaking? Is the bear market over or just getting started?
Yes and yes! I will lay out some of the reasons why I think inflation has peaked and the Fed will not need to move as quickly as everyone is calling for which will lead to a strong recovery for risk assets. As for the bear market in stocks, I do expect more volatility in risk assets in the coming months.
The S&P 500 has lost $9.3 trillion in market value from its Jan 3rd peak. It is now more than the Lehman crisis, which was $8.1 trillion. These are staggering numbers for sure but I do believe the worst may be behind us. As you can see from the chart below, investors continue to plow money into stocks.
The chart below shows that inventories at major retailers are absolutely surging causing companies to act quickly to offload product. This is deflationary.
Source: https://www.freightwaves.com/news/why-everyone-is-freaking-out-about-targets-inventory
Housing affordability is a major issue. If we look at where mortgage rates are right now, which is roughly 6%, the average home price will need to fall 30% to return to 2019 affordability levels. I do think we will see some softness in housing pricing, but I don’t think we will have a sizable correction that some are calling for. The median home price in the U.S. is sitting at $454,000 - an all-time high. Thankfully, housing starts are running red hot at the highest level since 2006. If we include single family homes, apartments, and condos, we are at an all-time high eclipsing the high from 1973 of the highest amount of housing units under construction. Here is an excellent chart of the 30-year mortgage that is up 56% year-over-year, which is putting pressure on consumer spending. I do believe we will see softer prices in housing and this number will come down as the market regulates itself with significant supply coming online.
Probably one of the biggest contributing factors to overall inflationary pressures was the sky high pricing in ocean container rates. According to the American Shipper, rates from Southeast Asia to the West Coast of the U.S.A. went from $15,551 on April 18th, 2022, to $9,177 - a 40% drop from two months ago.
Did oil peak? Energy prices have been a major contributor to overall inflationary pressures. Oil has gone down 17% in the last two weeks.
Natural Gas futures are down 25% over the last few weeks as well.
Copper also dropping 22%. The Fed is talking down commodities by pushing the notion they will continue to hike rapidly.
30-year treasury yields appear to be peaking as well around that important 3.50% level.
Aluminum is down close to 40% from the recent highs as well.
I think markets are fairly valued at this time and are neither cheap nor expensive anymore. Everyone is calling for another 15-20% downside to the indices, which is entirely possible if the slowdown gets increasingly worse or a black swan happens. I, on the other hand, think most of the bad news is priced in and while volatility may last a few more months/quarters, I do believe markets will start to rebound. Risk management is key!
I do think inflationary pressures will come down and the worst of it is behind us. Now, if we have any further geopolitical issues, this theory goes out the window. In any scenario in which NATO gets dragged into the conflict with Russia, I expect inflationary pressures to mount to even more extreme levels, which could cause a prolonged global contraction.
As I mentioned in my previous updates, I do believe deflationary pressures will return in a bigger way than it was pre-Covid. Once we get through this bear market downturn, I think the economy is set up to boom in the coming years with a very strong backdrop. Tune out the noise.
Thanks,
Korey
The publication of this newsletter falls outside of the scope of Korey Bauer’s (“Bauer”) employment with AXS Investments, LLC (“AXS”), and Bauer does not represent AXS in its publication. The views expressed in the newsletter solely represent the opinion of Bauer and do not reflect the views or opinions of AXS. Bauer’s opinions are subject to change and are not intended as a forecast or guarantee of future results, or investment advice. Stated information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While Bauer believes the information to be accurate and reliable, he does not claim or have responsibility for its completeness, accuracy, or reliability. The newsletter is made available for informational and educational purposes only and is not intended to be a substitute for professional investment advice tailored to your specific circumstances. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Bauer’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. These are Bauer’s views, and no company is responsible.
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