C.J. Lawrence Market Commentary – Markets grind lower; travel expenses up 18.6% in April

This post was originally written on May 14, 2022, 4:02 PM EST.

Despite a nice relief rally going into the weekend, the market continues to grind lower, down 2.4% for the week for the broader S&P500, now down 16% for the year. The Tech-heavy Nasdaq is down 24% for the year (up 29% in 2021). For most investors, this means that last year’s return has now been wiped out. On Wednesday, we got the much-anticipated April reading of inflation (CPI), which came in at 8.3% vs 8.5% in March, indicating a peak in the headline inflation year-on-year, but digging into the details, the market quickly figured out that the larger components like food and rents continue to rise.  There was some relief at the pump, which offset price increases in new cars and an 18.6% increase in airfares in April! There is obviously a huge pent-up demand for travel. The 12-month data on many of the items directly affecting the US consumer continues to be eye-popping, with four categories up more than 20%, see the chart below from the Wall Street Journal yesterday.

Further comments from the Fed Chair, Jerome Powell, following the data release suggest that the Fed is now less concerned about causing a recession but squarely focused on fighting inflation.  That means more short-term pain ahead but it is important for markets to get back on track long term.  There are several factors that lead us to believe that even if we go into recession, it should be shallow given financial conditions for the US consumer and the banking system remain solid.  When prices rise more than 8% while wages are only half that, the shortfall in purchasing power is currently being made up by drawing down savings.  A year ago, the US Personal savings rate stood at 12% as a result of various government programs putting cash directly into peoples’ pockets.  The savings rate is now down to 6%, indicating that the consumer is digging deeper into his or her pockets. At an unemployment rate of only 3.6% and jobs available exceeding what the workforce is willing to fill, it is still premature to talk about a recession.  Financial conditions among the US banks also remain very strong thanks to what banks had to do to shore up capital post the 2008/9 Great Recession.

For what it is worth, there was some evidence from insiders that stock prices have declined enough to buy the dip. Howard Schultz, now on his third stint as Starbucks’ top executive, is a case in point. He just bought $10 million worth of the beaten-down Starbucks stock. The stock is up 8% today as a result.

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.

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