Market Commentary

For the week ending 4/12/2024

The markets, along with the rest of us, got disappointing news on inflation last week.  The Consumer Price Index (CPI) for March came in hotter than expected with headline prices rising by 0.4% from the previous month against hopes for a 0.3% increase.  This put the annual inflation number at 3.5%, which was also higher than expected.  The major increases came in the area of “services” as opposed to “goods.”  Goods, you can infer, are anything you can carry in a box or in the back of a truck.  “Services” are more diffuse.  Rent and mortgage payments are considered a service.  So is insurance, as well as the more obvious examples of hotels, restaurants, barbers, and tax accounting.

Service prices, since they are influenced primarily by wages, are considered “sticky.”  The price of goods is influenced by many factors that can vary over time.  The price of copper, steel, lumber, cotton, and other commodities are subject to wild swings both up and down.  Temporary bottlenecks in the supply chain can also affect the price of finished goods.  Wages, on the other hand, seldom go down once they go up.

Insurance and housing are two unique cases keeping inflation stubbornly high. In the matter of housing, there simply isn’t enough of it.  This goes back to the financial crisis of 2008 and the “Great Recession” that followed.  Because so many people ages 21 to 35 were out of work, a whole generation of Americans delayed plans for family-formation.  Home builders reacted to this circumstance by slowing the pace of housing construction considerably.  When the recession ended, employment soared, to the point that we are currently experiencing an acute shortage of labor.  All of a sudden, the equivalent of two generations of Americans are forming families and looking for homes, and we are behind on housing construction by almost a decade.  Unusually high demand has met with unusually low supply.  The math isn’t hard to do.

Insurance costs have skyrocketed due to a combination of a surge in weather-related disasters affecting homeowner’s insurance, and the higher cost of automobiles.  A fender-bender that you used to be able to hammer out and fix for a couple of hundred bucks can now cost upwards of $4,000.

The swift trajectory of falling inflation from just over 9% at its peak in June of 2022 to the current 3.5%, all without having to undergo the pain of another recession, gave us the false hope that getting from 3.5% to the Fed’s target of 2.0% would be similarly easy and pain-free.  March’s CPI data was a bucket of cold water thrown on those hopes and Wall Street reacted with another bout of selling.

Thursday’s release of price inflation at the wholesale level was a little more encouraging.  Producer prices rose just 0.2% in March, a tick below expectations and well under February’s 0.6% increase. Input prices for manufacturing fell 0.1%, continuing a recent pattern of goods deflation that had been interrupted by a 1.2% surge in April.  This will help to keep goods prices down but, unfortunately, will have almost no impact on the price of services.

First quarter earnings season is underway with some of the big banks reporting earnings on Friday.  Overall, the reports came in a little better than expected.  The banks were helped by higher trading revenue during the bull run over the past three months, along with the ability to lower their costs on outstanding loans.

For the week, the Dow Jones fell 921 points to 37,983 (-2.4%), the NASDAQ was down 74 points to 16,175 (-0.5%), and the S&P 500 declined 81 points to 5,123 (-1.6%).

Oil fell $1.50 to $85.50/bbl.   Gold rose another $32 to $2,374/oz.

And the yield on the 10 yr. Treasury ticked up 0.1% to 4.5%.

The opinions in this commentary are the writer’s and may occasionally vary somewhat from the opinions of the Winch Financial investment team as a whole. Client recognizes that any opinions or analysis described in this commentary involve the Advisor’s judgment and good faith and do not constitute investment advice. All recommendations or observations are subject to various market, currency, economic, political and business risks. Client recognizes that no party to this alert has made any guarantee, either oral or written, that Client’s investment objectives will be achieved. Advisor shall not be liable for any action performed or omitted to be performed or for any errors of judgment or mistake, except in the case of Advisor’s gross negligence, willful misconduct, or violation of applicable law. Advisor shall not be responsible for any loss incurred by reason of any act or omission of Client, custodians, broker-dealers, or any other third party. Nothing in this commentary shall constitute a waiver or limitation of any rights that Client may have under applicable state or federal law, including without limitation the state and federal securities laws.