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Inflation and This Week's Market

Dear Clients & Friends,

For this weekend’s reading, it would be difficult to talk about anything other than Tuesday’s market drop. It was the worst day for the market since early 2020 at the beginning of the COVID pandemic – in other words, it was a doozy. The remainder of the week was pretty terrible for the market as well.

Tuesday’s main headline was bad inflation numbers. The Consumer Price Index ticked up by a whopping 0.1% (sarcasm intended). That’s 1.2% annualized, so why all the fuss?? The primary reason for this miniscule rise was a significant drop in energy prices. If we remove food and energy from the equation, CPI was up 0.6% - a whopping increase of 7.2% annualized. Additionally, the general price inflation figure was significantly higher than what was expected. It raised the rolling 12-month average to above 6%.

[In case anyone is wondering why we would exclude food and energy from any type of inflation assessment, it’s because the price of these items are easily manipulated and can endure wild swings based on a myriad of reasons. Because food and energy prices can experience great volatility, analysts prefer to use general inflation figures that exclude food and energy prices when they are tracking long-term trends. However, consumers tend to be affected by headline-making numbers because we need to pay for food and gas. Thus, the figures need to be evaluated in their proper context.]

There are many factors that play into the current situation regarding inflation. The biggest factor is the hangover from COVID-era stimulus packages. In addition, the Fed kept interest rates far too low for far too long during COVID. Once we realized that the economy wouldn’t crash and burn, the Fed should have stopped providing extreme economic accommodations (in my humble opinion). Money was cheap and there was too much supply – inflation was the result.

On the other hand, Wednesday’s Producer Price Index figure was not nearly as disappointing. Simply put, the core monthly data remained unchanged; this resulted in a lower annual number. Excluding food and energy, the number was up by 0.4%, which was less than the 0.6% change in CPI.

I believe that the market was eager for a disappointment. Since mid-August, we’ve been telling our clients that we didn’t think that the summer’s market uptrend was sustainable. (Our metrics guru Mr. Dan Levinson produced a technical analysis that would make your skin crawl.) The momentum began to deteriorate shortly thereafter. In addition, September has historically been the “worst” month of the year. Anticipation can certainly move markets.

So - what now? We completed our first dip buy in mid-June, and then rebalanced during the third week of August. So far, I’m comfortable saying that we are ahead of the game. So far… When the S&P 500 falls another 500 points, we will make our next dip buy. In addition, we will continue to proactively evaluate good entry points because, at the end of the day, you make more money in bear markets if you listen to your mind as opposed to your emotions.

Waiting for a reduction in inflation is a long process, especially when that inflation has built up over several years. I must assume that food and energy prices will decline when Putin loses his war. I am a little concerned about the large swath of the public who purchased homes that they couldn’t afford because mortgage rates were laughably low. Those that took on variable rate mortgages may be very unpleasantly surprised when they see the first bill after their initial loan rate expires. In addition, most people do not effectively examine the maintenance costs of their property. If a family who wanted to take advantage of the low rates bought a home that was more expensive (i.e. larger) than what they could normally afford, the cost of a larger home may be unsustainable even if their mortgage rates are fixed. We are not flirting with a disaster like we experienced in 2008, but it is a concern that I plan to study over the next few months.

That’s it for now. I’m about to head out and spend $30 on gas while driving to go get a $150 cheeseburger. Cheers!!

-Matt and the MORWM team


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