Stagflation Worries Take Center Stage as CPI Looms
This tricky market environment requires a stout defense.
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Following a poor day for technology stocks, the broader market is under pressure on Wednesday as investors await the latest U.S. inflation data. Economists are anticipating a headline number of 4.2%, which is driven primarily by high energy prices.
There is concern that a “hot” report will push the Fed to start raising rates, especially after the stronger-than-anticipated jobs report on Friday, which triggered a broad selloff in equities. However, there are some signs that economic growth may not be as robust as the jobs data indicated.
Economic Issues in China
An additional concern is the latest China inflation data, which showed that consumer prices were flat due to poor demand, while producer prices accelerated to their fastest pace in almost four years.
That divergence illustrates that global inflation is supply-driven by the Iran conflict and constrained energy markets, rather than demand-driven. That is the worst kind of inflation because rate hikes do nothing to fix the shortage of oil and energy. The Fed is being pushed to hike rates just as growth softens, which is the classic stagflation trap.
Chinese consumer demand is weak, and inflationary pressures are increasing. That is a problem that is starting to spread to the global economy including the U.S. and that is why stocks are lower Wednesday morning.
On top of the growing concerns about stagflation is the continued uncertainty about the Iran situation. The U.S. retaliated after Iran shot down a U.S. Apache helicopter. Oil has not moved much on the news, but there is talk that even if the U.S. and Iran do finally reach a deal, upward pressure on oil will continue.
The SpaceX Pressure on Tech
Pressure on the technology sector continues as investors are looking ahead to the massive SpaceX IPO on Friday. Indications are that the IPO is at least 3x oversubscribed and many investors are already raising cash to buy shares.
While the amount of the offering is only around $75 billion out of the $1.8 trillion valuation, most of the float will be unlocked over the next six months. That means there will be a steady number of shares dumped on the market for months to come. That is the headwind that is putting pressure on technology currently.
The Game Plan
This market environment requires a stout defense. I’ve been writing about raising cash and staying selective with new buys. That is helping, but in this sort of environment, there are few stocks with sustained upside. The rotational action is helping, but as we’ve seen, it can reverse quickly when broader economic issues arise.
Be careful out there. This is a tricky environment, and it is going to be unsettled for a while. Protect your precious capital and don’t let losses build.
At the time of publication, Rev Shark had no positions in any securities mentioned.
