A Consumer Price Index report last week showed 9.1% inflation—the highest level in four decades. Beneath the surface, key CPI components, like airfares, are falling. I believe it’s a sign of things to come.
Betting against inflation right now seems weird. Everyone, including the Federal Reserve, is on the opposite side of that trade.
The headlines are full of stories about inflation surging to the highest levels since the early 1980s. Gloom and doom about the economy, and the view that stock prices will be mired in a funk for the foreseeable future, is becoming the consensus view.
Last week, Bank of America (BAC) analysts slashed its year-end target for the S&P 500 to 3,600—the lowest marker for any of the big Wall Street investment researchers.
Analysts expect five consecutive quarters of negative gross domestic product growth as the Federal Reserve continues to raise short-term interest rates.
The forecast also predicts the Fed will keep rates elevated even as the economy slips into recession. That may not be a great bet at this point.
Federal Reserve Chair Jerome Powell has stated publicly the primary objective at the Fed is fighting inflation.
It makes sense.
Inflation is a hidden tax, especially for the people who can least afford higher prices. Here is the rub, though: Prices at the wholesale level are falling—precipitously. Wagering that the Fed will continue to raise rates aggressively is premature.
Consider some of these numbers:
• Copper prices on the London Metal Exchange, long considered the bellwether for the global economy, fell to levels not seen since November 2020. The key industrial metal is down 22% in the second quarter alone, the biggest loss since 2011.
• Lumber prices, also considered a leading economic indicator, are down 40% in the first half of 2022.
• And gas prices, heading into this week, have fallen for 30 consecutive days.
Some of the commodity weakness is beginning to show up in airfares. Ticket prices fell a seasonally adjusted 1.8% during June, according to the latest CPI report.
The Dangers of Deflation
Demand destruction is another factor in lower airfares. Consumers have been hit with historically high airfares, and a rise in short-term interest rates.
As those rates soar, consumers feel the pinch of larger variable-term mortgage payments. Nonessential travel expenses are an easy cutback. Reduced demand leads to lower prices.
It’s a vicious circle.
Deflation’s certainly not the prevailing narrative among investors. It is far easier to battle the demon that everyone can see at the gas pump.
However, rapidly declining prices kill profits, thereby discouraging investment. The Great Depression of the 1930s was a lesson in the perils of deflation.
Powell wants to squash inflation, while not awakening the forces of deflation.
So, what appears to be the best area to fight back with as an investor?
Healthcare Can Keep Returns Healthy
Healthcare is dominating the other ten S&P 500 sectors over the past month, having gained 8.4% (compared with a loss for the energy sector of 17.7%).
Many companies in the sector have carved out lucrative monopolies in the domestic landscape while successfully delving into niche international marketplaces. Profitability growth has been sure and steady regardless of macroeconomic factors like interest rates.
The Health Care Select Sector SPDR Fund (XLV) is home to iconic companies like Johnson and Johnson (JNJ), UnitedHealth Group (UNH), Pfizer (PFE), Abbott Laboratories ( ABT), Thermo Fisher Scientific ( TMO) and Merch (MRK). The exchange-traded fund has a dividend yield of 1.5%, and shares are rounding out of a short-term downtrend.
Investors should be wary of what the downturn in key commodity prices portends. While the large investment research firms worry about inflation, deflation could be much worse for corporate profitability.
Remember to do your own due diligence before entering any trade.
Jon D. Markman
Technology: Reshaping Our Lives
As a Forbes reader, you know that transformational technology not only improves lives, it creates huge fortunes as well. If you believe transformational tech holds the key to outsized growth, then you should try Forbes' flagship technology advisory, Fast Forward Investing.
Lead by Jon Markman, Fast Forward Investing believes that innovations focused on artificial intelligence, machine learning, digital twins, robotics and gene editing will transform the way we live and deliver mammoth growth.
54% of Remote Workers Feel Disconnected from Co... tags: COO Big Data Insights Drive Surge In Digital Market... tags: COO ‘Something’-as-a-service, the new f... tags: COO A Small Business Guide to Google My Business | ... tags: COO How Real-Time Analytics Can Help Assess ROI Of ... tags: COO Top 10 Tips to Finance Your Small Business | Fr..
14 Common Pitfalls New Entrepreneurs Face And H... tags: SMB Launching Your First Podcast? Follow These Eigh... tags: SMB 15 Strategies For Turning A Lackluster Brand Ar... tags: SMB strategies 14 Ways To Establish Yourself As A New Leader I... tags: SMB KamyarShah Posted from Diigo . The rest of my favorite links are here .
19 Brands with a Cult Following (And What You C... tags: COO Google is bringing VR to one million UK school ... tags: COO What Is Semantic Search and What Should You Do ... tags: COO 9 Sizzling Influencer Activation Tips from Lee ... tags: COO Giant investors blame pay consultants for spira... tags: COO Who do CEOs turn to for advice? | For