The Tide Could Be Turning

Stocks retreated from record highs, last week, as investors confronted data showing the highest inflation in three decades. On Tuesday, the S&P 500 Index registered its first decline in nine sessions, ending its longest winning streak since 2017. Consumer discretionary shares led the declines in the S&P 500 following a steep fall in Tesla, after CEO Elon Musk announced plans to sell some of his shares. Energy shares were also especially weak, with oil prices backing away from recent peaks. The small materials sector performed best, boosted by the recent advancement of the Biden administration’s $1.2 trillion infrastructure bill through the House of Representatives. The week was also notable for the initial public offering of electric vehicle maker Rivian (RIVN)—the largest for a U.S. company since Facebook in 2012.

The major indices fell sharply on Wednesday morning following news that the consumer price index (CPI) jumped 0.9% in October, well above consensus expectations of around 0.6%. The increase brought the year-over-year CPI increase to 6.2%, the highest since December 1990. A surge in energy prices deserved much of the blame, but core inflation, which excludes the volatile energy and food segments, rose 0.6%… much more than expected. A poorly received auction of long-maturity Treasury bonds may have further soured the mood for equity investors. These Treasury auctions are public auctions held by the United States Department of the Treasury, and they are designed to help lower the cost of financing the national debt by offering competitive bidding in a “risk free” environment.

Most observers attributed the surge in inflation to ongoing supply chain pressures and higher consumer demand, as the coronavirus ebbs and more people reenter the workforce. Positive news on these fronts may have helped cushion the week’s losses. Sentiment seemed to get a continuing boost from Pfizer’s announcement that it was seeking emergency approval for a highly effective treatment for COVID-19. Weekly jobless claims hit a new pandemic-era low of 267,000, and the Labor Department reported that there were 10.4 million job openings in September, a slight decline from August’s record, but still above expectations.

Consumers appear to be paying much more attention to higher inflation than the healthy job market, however. On Friday, researchers at the University of Michigan reported that their gauge of consumer sentiment fell to its lowest level (66.8) in a decade, due to inflation worries. (In comparison, the gauge’s previous nadir in April 2020 following the outbreak of the pandemic was 71.8.) Moreover, “rising prices for homes, vehicles, and durables were reported more frequently than any other time in more than half a century,” according to the survey’s chief economist.  The tide could be turning, and we remain vigilant in our efforts to recognize the opportunities that await.  At the same time, we remember the wisdom found in Proverbs 27:23 and maintain a close eye on stewarding the gains from earlier in the year: “Know well the condition of your flocks, and give attention to your herds.”

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