Inflation is HOT again

Inflation persisted in the month of August. The release of the inflation readings this morning sent the market on a selling spree.

Gas prices – the pain of the summer – are lower; however, food, shelter, and medical costs are still largely elevated. 

In fact, it’s estimated the cost of eating at home is roughly 13% or so higher over the past year. According to CNBC, this is the largest increase since March 1979.

On the inflation news this morning, short-term bond yields shot higher, which is generally a signal investors are expecting near-term weakness. In the current environment, the bet is on the Fed continuing to raise rates in attempt to control inflation. 

Bond yields respond to inflation

Here’s a look at the current yield curve: 

Follow the blue line. The red circles are mine and are drawing attention to the short-term rates being currently higher than the long-term rates. This is referred to as an inverted yield curve.

Remember the see-saw? When bond yields rise, bond prices fall. Bond yields rising means money is flowing to other places. Currently the favorite other place is cash – even though cash is yielding less than bonds. 

Think of it similar to the stock market: if prices are going down, it’s natural to be fearful of being the last one to get out. 

Investing with patience

2022 has been the year of exercising patience. Even with persistent inflation, the economy and markets are still showing resilience.

Though it may seem like the market has been horrible this year – and it has – the buy-side of the market keeps fighting against sell pressure. The S&P 500 is down 17.49% year-to-date, clawing back after hitting nearly hitting down 25% in mid-June.

Frankly, it could be worse.

Take a look at this chart over the pas 5 years. Red bars are weeks the market finished negative, while green bars are weeks the market ended positive.

I counted 22 red and 15 green since the start of 2022.

As for the triangle drawn, this will be a high-level technical analysis read. Note the lines and levels are not exact and may vary by analyst.

Looking to market performance for clues

The bottom line I’ve drawn on the chart shows we are currently testing what could be considered a long-term support support level. This is the price level the market will attempt to hold. That line shows the market is essentially back to the level beginning February 2021.

Also notice that small bars, mostly green, caused the market to rise sharply for most of 2021. Fast forward, there is an obvious downtrend since January 2022. Observe the bigger bars, mostly red, causing the market to fall at a faster pace.

Up like an elevator, down like a roller coaster.

If you’re looking for a bias confirmation, you’ll look at this chart and see either fear or opportunity.

If you’re prone to see fear, the market could break below the bottom trend line and potentially free-fall all the way to around 3650 before finding another support line. This is about the level we saw in June of this year.

Or, you might look for opportunity. If so, note the bars reached the bottom level and bounced, then fell below it in May and June. We had a good July and then have back to bouncing around the line. We might call this an attempt to build a base. There are several other technical indicators evident in this chart; however, I won’t cover those in the scope of this post.

If you want a deeper dive, please click here and we’ll set time to talk further.

What this means for you

When inflation hit a little over 9% back in July, I wrote about one question many in the media and in the financial world never ask but always tell: what times like these should mean to you.

How do you feel about your cash flow? Where are you expecting to be financially one year from now? What is happening in your life that makes you nervous when you look at your investments?

Is your advisor proactively asking these kinds of questions? If not, it may be time for a second opinion. Click here to see what you should expect when working with a real financial advisor.