Inflation is the big story of 2022 and we got another bad reading on Friday. The latest report showed that inflation hit a 41-year high in May. Here are some more details from CNBC.
- The consumer price index rose 8.6% in May from a year ago, the highest increase since December 1981. Core inflation excluding food and energy rose 6%. Both were higher than expected.
- Surging food, gas and energy prices all contributed to the gain, with fuel oil up 106.7% over the past year.
- Shelter costs, which comprise about one-third of the CPI, rose at the fastest 12-month pace in 31 years.
- The rise in inflation meant workers lost more ground in May, with real wages declining 0.6% from April and 3% on a 12-month basis.
The hot read on inflation is hitting markets pretty hard. Stocks have had a pretty rough week.
- The S&P 500 (SPY) is down 9% in the last five days.
- The Vanguard Global Stock Market (VT) is down 9% in five days.
- The tech heavy NASDAQ (QQQ) is down 12% in five days.
After the tough week, the S&P 500 officially fell into a bear market, down more than 20% from the 52-week high. The NASDAQ is down 31% from the 52-week high. Take a look at the chart of 2022 below.
Is There Any Relief In Sight?
There’s no question things are rough right now. Inflation is killing consumers and its weighing pretty heavily on the stock market. However I see relief happening sooner than later for three reasons.
Peak inflation: The big problem for everything right now is inflation. If we can get inflation to peak and start cooling down it would be very good for consumers and stocks. I expect peak inflation to happen within the next six weeks. There is a high probability that inflation will top out in July during peak driving season and gasoline consumption. Once we get past that seasonal inflation peak, the price of gasoline should start to modestly decline and lead overall inflation lower for the rest of the year.
How long does a bear market last? A bear market happens when stocks fall 20% from the 52-week high. Since 1982 they have happened once every four years and eight months. According to research from Bank of America, the last 19 bear markets have lasted an average of 289 days. If this sell off plays out like an average bear market, then its more than half over and we should see stocks rebounding 20% from the low in late summer or early fall.
A bullish 7-month cycle: The seven months from October to April are historically very good for stocks. This year, that would line up with the potential expiration of this bear market. Take a look at the table of returns below.
Here is the Plan Moving Forward
I am expecting markets to remain volatile this summer. The plan is to sit tight and ride out the storm. However, I am expecting inflation to peak in July and I expect stocks to begin stabilizing shortly after. Historically, weakness in the stock market is usually a good time to buy. If stocks are down in August and September it could end up being a great time to buy and I will be looking to capitalize.
I’ll be back with another update next week, everyone have a nice day.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading. Author Michael Vodicka owns shares of the S&P 500 (IVV), Vanguard Global (VT), NASDAQ 100 (QQQ).