Hello from the mountains of Northwest Pennsylvania where I spent much of the weekend staring into the woods hoping to spot my native bear. True Story: Witnesses say she’s out there. But for some reason I can’t properly plan my visits. I’ve been pondering this for months.
In a fun cosmic twist, Monday came with a big bear of a different kind.
Here’s the deal: We’re officially in a bear market, which is what happens when stocks close 20% or more from their last high.
Why are stocks falling?
In short: inflation and the Federal Reserve’s efforts to tame it.
The investors’ nerves were already on edge, and then Friday came. A closely watched inflation report showed prices rose 8.6% in May, the fastest rate since 1981. Inflation is not a new problem, but that reading has dashed any hopes of a slowdown.
For investors, the inflation gauge signals that the Fed needs to be much more aggressive in raising rates, which Wall Street hates. Higher interest rates make it more expensive to borrow money, and that tends to hurt profits and stock prices.
What will the Fed do?
We’ll find out at the end of the central bank’s two-day monetary policy meeting on Wednesday.
Just a month ago, stocks rallied after Fed Chair and verified silver fox Jerome Powell said the central bank was not “actively considering” a three-quarters-point rate hike. But that doesn’t mean it’s off the table now.
A three-quarter-point rate hike is not uncommon but extremely rare, writes my colleague Paul R. La Monica. The last time the Fed raised rates by 75 basis points was in the Alan Greenspan era, in November 1994. (Remember 1994? Boyz II Men dominated radio, Disney released The Lion King, and the world was not yet keen on the ill-advised Rachel Cut).
Currently, most analysts are expecting a half-point hike. But expectations for a three-quarter-point rise have risen to 40% now from just 3% a week ago, according to CME’s FedWatch tracker.
The inflation situation sucks and the Fed basically has only two tools – interest rates and reducing its massive Treasury purchases – to try to fix it. But the Fed has no idea how much tightening is the right amount, and we won’t know if that tightening was too much or too little until long after we’ve entered (or avoided) a recession.
NUMBER OF THE DAY
Bitcoin, the world’s largest cryptocurrency, has lost more than 20% of its value since Friday, briefly falling below $23,000, its lowest level in 18 months. Other cryptos have also been sold off as investors fled risky assets like digital currencies and tech stocks.
The meltdown prompted two of the world’s largest cryptocurrency platforms to temporarily halt trading.
Seasoned investors know that even when things look as bad as they did on Monday, you can always find winners on Wall Street. The safe havens of the day? Coca-Cola, Peanut Butter and Kleenex. Not a bad plan for a night in, tbh.
Here’s the deal: Everything was pretty much down on Monday as a sell-off that began on Friday continued.
So traders flocked to consumer goods companies selling essentials. Coca-Cola and Smucker were among the top performers in the S&P 500, writes my colleague Paul R. La Monica.
Also slightly up: Kleenex manufacturer Kimberly-Clark, McDonald’s, Hormel Foods and Kroger. (Pepsi, Tyson Foods, Kellogg, and Hershey stocks all declined much less than the broader market.)
Among the biggest losers were stocks in the travel and leisure sector – think casino owners, cruise lines and airlines.
In short, retailers do what people do when the going gets tough: Stock up on comfort foods and toilet paper.
Cola, one of Warren Buffett’s favorites, deserves a little special attention here. Its shares are up 3.6% this year — a bonanza compared to the broader market (see stock carnage above).
After all, canned cocktails are the new hard seltzer. It’s honestly unbelievable that a Jack and Coke can hasn’t happened until now. Coke also launched Topo Chico Hard Seltzer and Simply Spiked Lemonade. And we were promised a Fresca cocktail sometime this year – keep an eye out for a probably off-kilter review from this longtime Fresca Stan at this point.