Can We Talk About Inflation?
Inflation is rising, which is a bad omen for the market.
In early 2021, inflation was something written about in history books. Unless you remembered the late 1970s, you had never really experienced inflation.
At the end of 2021, inflation was a very real problem for real people, but the market thought it was a short-term event. Stocks rose nearly 30% during the year, and there was reason to be optimistic as jobs opened up and the pandemic subsided.
But that euphoria only lasted so long. Inflation caused very real changes in how people spent money and prompted a major response from the Federal Reserve. When the market finally woke up, it wiped out all of 2021’s gains and, in the case of the Nasdaq, then some.
Are we in the same place today?
It may be worse. But more on that in a moment.
Weekly Update
The stock market’s insane run continued last week, although it took a breather late in the week. Earnings season has been phenomenal, and stocks have reacted by pushing higher all season.
There were fits and starts in the Asymmetric Portfolio over the past couple of months, but it continues to lag the market’s highs. That’s largely because I have very little exposure to semiconductors and energy, which are leading the market this year.
For now, not having exposure to hot segments of the market is a detriment. But long-term I think it’s best not to chase what’s hot and instead stick to my long-term compounders.
In Case You Missed It
Hims & Hers: Short-Term vs Long-Term: If you’re looking at first-quarter results for a turnaround, you’re looking in the wrong place.
Sustainable Growth: Why I own long-term compounders and not temporary growth stocks.
Interview With Oscar Health CEO Mark Bertolini: I had an insightful chat with Oscar Health CEO Mark Bertolini about health insurance and how Oscar could be a disruptor long-term.
What’s Up With Inflation?
April inflation data — known as the consumer price index (CPI) — came out last week, and prices rose 3.8% from a year earlier, driven by energy and food costs.
This shouldn’t be a huge shock. Crude oil prices have jumped since the U.S. started bombing Iran.
And the price of gasoline has more than doubled since the start of the year.
But it may be worse than that. The producer price index (PPI) was up 6%, the highest level since early 2023. It could continue to rise as energy price increases flow through the system.
What’s different today versus in 2021?
Everything!
In 2021, the world was full of all kinds of weird shortages from electronics to commodities, which sent prices higher as people went back to living more “normal” lives as the pandemic came to an end. The entire year was an odd mix of supply and demand imbalances that took until the end of 2022 to work through.
We also went from a 0% interest rate environment to a more normal 5.25%.
The market didn’t like what it saw in 2022.
Stocks fell over 20% from peak to trough despite a booming jobs market and no recession.
Will this time be the same or different?
I think the reasons to be concerned outweigh the reasons to be optimistic.
Why Inflation Could Be Sticky
Rising oil prices act like a tax on consumers and nearly every business (ex. plastics, lubricants, etc)
Supply shortages take months to move through the system, and we haven’t really seen the impact of the Straight of Hormuz shutdowns
Higher food prices are second behind energy in the impact on CPI, and there’s no sign that prices are going down
Why a Recession Is Likely
The consumer is showing signs of breaking
Restaurants are struggling
Retailers are struggling
Now, energy and food will eat more of their paycheck
Debt is up, and interest rates may be next
During the pandemic, consumers paid down debt, but credit card and other revolving debt are now at all-time highs again
If inflation continues to be a problem, the Fed will be forced to raise rates, slowing the economy further
AI gives job cuts an excuse
The unemployment rate is still low, but that may not be true for long if predictions of job cuts come true
Management can now use “efficiency” and “AI” as an excuse to cut more jobs
Add it all up, and I think there’s reason to be worried about the economy and the market as the year goes on.
I’m not changing how I invest in the Asymmetric Portfolio because I’m happy to buy compounders at a long-term discount today. But I’m aware that the AI buildout is propping up big chunks of the market, and an economic downturn may cause cracks in the tech spending-fueled euphoria.
The market is being greedy, and I think it’s time to be fearful.
But it looks like I’m the only one who feels that way right now.
Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
