Hello from the mountains of northwestern Pennsylvania where I spent much of the weekend staring into the woods hoping to spot my local bear. True story: She’s out there, according to witnesses. But for some reason, I can’t time my visits right. I’ve been whining about this for months.
In a fun cosmic twist, Monday arrived with a big bear of a different kind.
Here’s the deal: We’re officially in a bear market, which happens when stocks close 20% or more from their most recent high.
Why do stocks fall?
In short, inflation and the Federal Reserve’s efforts to tame it.
Investors’ nerves were already tense, and then it was Friday. A closely monitored inflation report showed that prices rose 8.6% in May, the fastest pace since 1981. Inflation is not a new problem, but that reading wiped out all hopes of a slowdown.
For investors, the inflation reading indicates that the Fed will have to be much more aggressive with rate hikes, which Wall Street hates. Higher interest rates make it more expensive to borrow money, which tends to undermine earnings and stock prices.
What will the Fed do?
We’ll know on Wednesday at the end of the central bank’s two-day policy meeting.
It was just a month ago that shares rose after Fed Chair and Verified Silver Fox Jerome Powell said the central bank is not “actively considering” raising interest rates by three-quarters of a percentage point. But that doesn’t mean it’s off the table now.
A three-quarter point rate hike is not unheard of, but it is extremely rare, writes my colleague Paul R. La Monica. The last time the Fed raised rates by 75 basis points was in the Alan Greenspan era, in November 1994. (Remember ’94? Boyz II Men dominated the radio, Disney released The Lion King and the world was not yet charmed by the ill-advised Rachel Cut).
For now, most analysts expect a rise of half a point. But expectations for a three-quarter-point increase have risen from just 3% a week ago to 40% now, according to CME’s FedWatch tracker.
What it comes down to:
The inflation situation is crappy, and the Fed really only has two tools: interest rates and cutting its massive purchases of Treasury bills. – to try to fix it. But the Fed has no idea how much tightening is the right amount, and we won’t know if this tightening was too much or too little until long after we’ve entered (or avoided) a recession.
NUMBER OF THE DAY
Bitcoin, the world’s largest cryptocurrency, has lost more than 20% of its value since Friday, briefly slipping below $23,000, its lowest level in 18 months. Other cryptos were also sold as investors fled risky assets such as digital currencies and tech stocks.
The meltdown prompted two of the world’s largest cryptocurrency platforms to temporarily suspend trading.
Savvy investors know that you can always find winners on Wall Street, even when things look as bad as Monday. The safe harbors of the day? Coca-Cola, peanut butter and Kleenex. Not a bad plan for a night in, tbh.
Here’s the deal: Pretty much everything was on Monday, while a sale that started Friday continued.
So merchants flocked to consumer products companies that sell essential products. Among the top performers in the S&P 500 were Coca-Cola and Smucker, writes my colleague Paul R. La Monica.
Also slightly up: Kleenex maker Kimberly-Clark, McDonald’s, Hormel Foods and Kroger. (Shares of Pepsi, Tyson Foods, Kellogg and Hershey all fell much less than the broader market.)
The biggest losers were stocks in the travel and leisure sector, such as casino owners, cruise lines and airlines.
Basically, traders do what people do when the going gets tough: stock up on comfort foods and toilet paper.
Coke, one of Warren Buffett’s favorites, deserves a little special attention here. Shares are up 3.6% this year – a bonanza compared to the broader market (see stock carnage above).
After all, canned cocktails are the new hard seltzer. It’s really unbelievable that no Jack and Coke can has happened so far. Coke has also rolled out Topo Chico Hard Seltzer and Simply Spiked Lemonade. And we’ve been promised a Fresca cocktail sometime this year – check out this space for what’s likely to be an unhinged review of this old Fresca stan.