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US equities sank on Friday as investors digested new earnings data that painted an increasingly bleak image of the economy’s status. Last week Goldman Sachs announced job cuts, while General Electric acknowledged persistent supply chain concerns.
These troubling indicators from large US corporations and the Fed’s tightening monetary policy have heightened recessionary worries.
The Dow Jones Industrial Average plummeted by more than 3,000 points, or 9.34 percent, in the previous month.
The S&P 500 is on track for its worst yearly loss since the Great Recession of 2008.
Bears are running wild….
Many investors believed that US inflation had begun to fall, and the numbers for August demonstrated that it had not.
The gap between market enthusiasm and macroeconomic reality triggered an earthquake on Tuesday, with the S&P 500 dropping more than 4% and the Nasdaq dropping more than 5%.
The declining annualized rate of inflation, as measured by the Consumer Price Index, has been the narrative for the previous few months (CPI). The normal caution applies: CPI is a short-term assessment tool that does not reflect the real inflation rate.
Personally, I look at Truflation, which tracks actual costs in real time to give me a better idea of inflation.
The CPI annualized inflation rate declined from 9.1 percent in June to 8.3 percent in August, which is just part of the story. I’m most concerned with monthly inflation, which jumped 0.1 percent in August.
It may not appear to be much, but consider the context: Most prices are still growing, but dropping oil and gas costs are the sole reason we saw a 0.1 percent month-over-month increase.
My point is that inflation is far from over, and the Fed still has a long way to go. Since last year, the conventional wisdom has held that the Fed must undermine demand.
Inflation will not fall considerably unless we witness a prolonged reversal in property prices and higher unemployment.
Brack yourself; the stock market is setting up for a very RED October.
Ray Dalio, the founder of the Bridgewater Associates investment firm, mentioned last week in a LinkedIn post stated that the upcoming Federal Reserve interest rate rises would cause the stock market to fall by 20%.
“The process begins with inflation.” Then it moves on to interest rates, other markets, and the economy.”
“With inflation well above what people and central banks want (e.g. today’s CPI report showed a monthly change in the core CPI of 0.6 percent, which equates to an annualized rate of 7.4 percent) and the unemployment rate low (3.7 percent), it’s obvious that inflation is the targeted problem, so it’s obvious that the central banks should tighten monetary policy.”
Dalio predicted that the central bank would raise interest rates by another customary 75 basis points. That interest rate would conclude at 4.5 percent.
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