Friday, May 20, 2022

U.S. stocks teetering on the edge of a Bear Market ?

SOURCE:

... stocks are pretty close to collapsing. The S&P 500 is down around 19 percent from its January close. That puts us just one percent away from the official marker of a “bear market.” 

To put that in context, the S&P collapse during the initial phase of the pandemic was 34 percent from peak to trough. Those who can still laugh are saying the market has turned their 401(k) into a 301(k).



The Philadelphia Fed’s manufacturing survey certainly did not add any reason to be confident. Just as the New York Fed’s index did at the start of the week, the Philly Fed gauge unexpectedly plunged. The general conditions index came just shy of falling into negative territory, indicating that growth is near a standstill.

Even worse, this month’s special questions indicated that inflation expectations have become unanchored and are moving quickly upward. Back in February, firms said they expected 5.5 percent inflation over the next year. In the most recent survey, they said they are expecting 6.5 percent. Expectations for annual inflation over the next ten years jumped from three percent to 3.5 percent.

This should be setting off alarm bells inside the Federal Reserve. In the Fed’s view, inflation expectations are themselves a powerful influence on actual inflation. Ever since the current bout of inflation took off, Fed officials have been trying to reassure the public that inflation will not become a long-term problem because inflation expectations remained anchored.

The persistent inflation and the high price of gasoline—which has hit an all-time high every single day this week—appear to be finally moving expectations away from their former anchorage.

Rising home prices are usually a sign of economic strength, but they make a different impression in an inflationary environment. So, when the median price for a home sold in April hit an all-time high, that was generally seen as troubling news. It’s not that investors are expecting a housing crash; it’s just that the escalating prices of existing homes is another sign of an economy overheated by demand and starved for supply.

The volume of sales fell all the way back to the lows last seen in June 2020, when much of the economy was on lockdown. And keep in mind that when a family sells their home for an outsized gain, they’re typically also buying a home at an inflated price.

Sometimes that’s just how the market and the economy feel, and you wish someone would come along and turn the money green once more."

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