It seems that inflation has not yet peaked as was previously thought back in March. The latest May CPI reading came in at 8.6% which is a new, 40-year high (8.5% in March / 8.3% in April). Investors are indeed nervous as our markets sold off on Friday in reaction to this latest data point. We have been discussing the likelihood of “retesting” the lows we saw several weeks ago. While we are not there yet, it seems plausible that this is likely to occur. The recurring talking points of recessionary fears, the Federal Reserve being more aggressive in raising rates and consumer spending slowdown all hit the headlines hard again on Friday. With the data we saw today, it was to be expected. Interesting to me however, the VIX (volatility index or “fear” indicator) remains largely in check closing out on Friday at a 27.75 level. Remember that the normal range is 15-19 and during the peak of COVID in March 2020, the reading was as high as 85! Simply put, there does not appear to be a lot of panic in the selling pressure we are currently seeing. For better or worse, investors and consumers alike are resigned to the state of things right now. Don’t get me wrong, no one likes what is occurring in any shape or form right now. I think there is just more acceptance of what our situation is right now. On many levels, our behaviors will reflect how we are feeling (think spending, travel, consumption, wants/needs, etc.).
With the Federal Reserve set to meet next week for their June meeting, the expectations remain that they will increase interest rates by 50-basis points. Of course, after the CPI data on Friday, the rhetoric around a 75-basis point increase made the rounds again. Personally, I just don’t see it happening. Is it warranted based on the data? Probably. But the Fed’s job is to act rationally, avoid any sense of panic, and remain as steady as possible in landing this economic plane safely intact. No easy feat! All of this begs the question, “Why is this happening?”. We are collectively feeling the direct impact of too much easy money that flowed into the system. Our economy temporarily closed for business two years ago, but employment remained relatively robust, minus the services sector. We managed to save money while additional money was pumped into our accounts artificially via stimulus checks. Couple all of this with a low interest rate environment and the ensuing party was enjoyed by all. Now that reality is setting in, the hangover is real and not much fun. At least not today.
The encouraging part is that employment and corporate balance sheets remain strong. These two components are a major player in a real recessionary environment. Those boxes remain far from “checked” right now which leads to the conflicting theories we keep hearing. The stock markets are fickle creatures, but smart money tends to be far ahead of the curve in these scenarios. Are we already pricing in the bulk of the negativity? It seems likely that much of the pain has already been inflicted, which might be the reason we are seeing a lower-than-expected VIX indicator right now. My words of advice would be to go see Top Gun Maverick or the new Jurassic World movie this weekend. Enjoy a bucket of popcorn and a nice cold Coke. These simple pleasures can still make us happy!