I don’t know about you, but I feel like I’m glued to the news recently.

With all the stories swirling around of war, pandemics, and political scandal, it’s enough to make your head spin. And as we watch the market dip and pop, it’s hard to reconcile news against the prices of our investments.

But as far as I see it, there’s really only one thing we need to focus on.

So in today’s essay, I’m going to show you the one simple piece of information that all investors are really waiting for, whether they know it or not.

Market Volatility Continues

On June 15, Fed Chair Jerome Powell announced that the Fed funds target rate would rise 75 basis points. That 0.75% rate hike was briefly met with market cheer.

Investors on Wall Street were waiting for decisive action to combat vicious inflation. Stocks ended up closing significantly higher on the day.

Yet all that was washed away – and then some – with some violent selling on Thursday, June 16. Switzerland unexpectedly raised its target rate by half a percentage as well. And the UK enacted its fifth straight interest rate hike.

Stocks closed firmly in the red in price action that looked a lot like capitulation, as we discussed last Thursday.

Everything went down… All sectors closed lower on the day. Both stocks and ETFs were sold in very high volume. It looked like people were throwing in the towel.

And in the time since, the stock market has shifted from up to down and back again – sometimes even on the same day.

But this type of volatility just goes to show that there really is only one piece of information that people are looking for to soothe their minds:

That is the slowing of inflation.

Two Main Pain Points

The week prior to all this, the Consumer Price Index (CPI) report was released on June 10. The inflation numbers were just plain hideous.

But there was one main takeaway… Inflation is running rampant in mainly two areas: food and gas.

Below, I provide a table from the Bureau of Labor and Statistics. I took the liberty of highlighting inflation greater than 5:

(Click to Enlarge)

Energy and food costs are the main killers right now.

Energy can be broken down into crude oil and its derivatives. This affects everything from diesel fuel and jet fuel to utility piped gas services.

Of course, if any of you are planning any summer travel, all you need to do is look at airfare. They’re up 38% year over year. There is increased demand coupled with fewer flights, but on top of that, energy costs related to flights have skyrocketed, accounting for much of that increase.

And as inflation costs run rampant in energy and fuel, the American consumer has no choice but to spend more. It costs more to drive to work and feed your family. Neither of those things is really optional.

As a result, it will be hard to find relief in the markets until energy and food prices in particular stop inflating.

The bad news is that energy prices usually spike in the summer due to a seasonal surge in demand as people drive more, use more air conditioning, and go on summer vacations.

The good news is that fuel costs in their usual cycle typically wane starting in September.

Food costs have spiked for several reasons…

Labor shortages due to COVID helped contribute to all sorts of supply chain issues. As labor resumes, the backlog is still huge. It is taking a long time to get back to pre-pandemic surplus days.

And the war in Ukraine has only complicated matters. Ukraine is the breadbasket of Europe… It supplies 35% of the world’s grain – yet many of its farms are now offline.

Even if the war ended tomorrow and those farms immediately started growing food, it wouldn’t be enough. The world would have to wait for a minimum of one crop cycle just to match output from the pre-pandemic in an ideal situation.

We are far from that now.

Naturally, the world has to grow and adapt to these different circumstances. New food production and consumption avenues are being put in place. Our reliance on that region will certainly dwindle even after the war resolves itself.

But these forces take time. And in the meantime, stocks are wildly volatile.

Is a Recession Guaranteed?

Much of the world has simply concluded there will be a recession in the United States. But not everyone is convinced.

According to President Joe Biden and Fed Chair Jerome Powell, that is not necessarily the case. It remains to be seen whether we’ll hit that point.

There are other bits of positivity to cling to too. As I’ve shared recently, JPMorgan’s Chief of Macroeconomic Research sees the S&P 500 up to 4,900 by the end of the year. He sees no recession.

And earning analysts still have not cut earnings estimates.

S&P 500 consensus revenues estimates are still at record highs. The same goes for earnings forecasts for this year and next. Forward profit margins rose to a record high as well.

It’s hard to reconcile positive data points like this alongside the “doom and gloom” sentiment many other investors feel right now.

Yet this very difference of opinion is part of why we’re experiencing such volatility. The market hates the uncertainty over inflation. And when we get wild differences of opinion, we see them reflected in market swings.

The market is trying to predict the future despite having a mixed view of where we’re headed.

So stocks will be a bumpy ride for the near future. And this volatility is not going to go away until we see slowing inflation. Prices at the pump and the grocery store need to start coming down to show that the Fed’s medicine is working.

Once we begin to get signs like that, the market should find its footing quickly. And even better, we should significantly rally from there. Stocks have been pounded into oblivion, which means there are plenty of opportunities… if we know where to look.

As for when that happens, the next CPI report comes out on July 13. Based on what I see every time I fill up my car, I don’t expect fuel prices to edge down much. And feeding a family of five is as expensive as ever.

But heading toward the last quarter of the year in particular, we could start to see a real shift begin to happen. And heading into 2023, I think we have a good chance of getting back to more normal market action.

And once inflation starts to turn around, look out above. Once the shift happens, investors who’ve been scared out of the market in the first half of this year will be piling into now oversold stocks.

Talk soon,

Jason Bodner
Editor, Outlier Insights