Markets faced another round of heavy selling on Wednesday sparked by a dire report from retail giant Target (TGT) whose inflation hindered profits were cut in half as compared to the previous year. The news took the stock down nearly 25%, marking its largest single-day loss in over 30 years. While this company isn’t necessarily a market bell-weather, the news of just how impactful rising prices have been on this retailer was enough to ripple through the entire market, specifically companies traditionally used as safe havens such as consumer staples. Coca-Cola (KO) shed almost 5% while Proctor and Gamble (PG) dropped more than 6% as investors feared that even the traditional safe havens were not immune. Bonds, which have not provided their traditional anchor, caught a bid with the 20-year Treasury up almost 2%, which was nice.

Markets have clearly cast their vote that despite the Fed’s best efforts we will not see a soft landing but rather a significant economic slowdown. While I continue to scratch my head over the Fed’s attempt at using monetary policy to control a fiscal policy issue, not to mention a war, it has become pretty clear that Jay Powell will take a page from Paul Volker’s book and stop at nothing to fight inflationary pressure, even if it means using a recession to do it.

Throughout the 1970s, as inflation rose a cumulative 100% from 1973 through 1980, the Fed moved rates to as high as 20%. An early recession was then followed by stagflation, which marked a lost decade for economic expansion. While markets remained quite volatile throughout that time period, the end result was basically a flat return as the S&P began 1970 at 92.60 and ended the year at 107.94.

From my vantage point, the speed at which inflationary pressure will subside will far exceed that of the 1970s due in part to the reason for its existence in the first place. Unlike the 1970s, where removing the gold standard so that the world would stop hoarding dollars, thus sparking a significant monetary devaluation, our issue at present has much more to do with a cog in the wheel of product development and distribution than an erosion of our dollar value, at least for the time being.

Not a day goes by when someone doesn’t ask me, why then do we not just go to 100% cash and sit idle until things improve? The challenge with that is that markets will absolutely find a bottom before the news reports the reason why and timing this is nearly impossible. While our goal is not to time the pops and the drops, it is to maintain a well-balanced portfolio with an eye on the much longer-term than the short-term volatility. As stocks continue to remain on sale, rather than be scared out of these companies I want to view this as an opportunity knowing that, over time, they will continue to compound their value, navigating these difficult economic times and ultimately as a shareholder, we will be rewarded for our patience.

Throughout last year I felt very strongly that inflation was coming and that few would be prepared for this. We went so far as to do a series of Webinars entitled the ‘Inflation Freight Train.’ As I discussed this pending challenge, I found it of critical importance to provide a ‘solution’ for the upcoming challenge, which revolved around paying down debt. My position was simple, with little to no fixed debt payments, one can more easily handle the expanding variable costs that hit us daily. This was an unpopular view, as interest rates were in the low single digits.

Our country is plagued with debt, from the consumer to the municipality to the national government. Like the coffee shop slogan ‘We run on Dunkin’ our country’s slogan could easily be ‘We run on debt.’

My view of the situation is really quite simple. Despite headlines, general inflationary pressure is coming down fast. Copper is down 16% since March, Steel is down 10% while Aluminum is down 25%. While it will take some time for these commodity futures prices to ripple through the system, they are happening at the same time that demand for products is coming to a halt and businesses likely will soon see a significant increase in inventory. This will ultimately lead to significant price reductions; however, the question remains as to what economic expense this will cause.

With most stocks pricing in a full-on recession, investor negativity and pessimism at levels not seen in years, I continue to feel this is an area where markets are attempting to find their footing. With the final tech names such as Apple and Microsoft being added to the significant selloff list, along with the staples listed above, this may be precisely what was needed before any relief may set in.

As I write this, we have another ugly start to the day after a smattering of negative earnings reports throughout last evening. Bonds are up again, which means yields are lower. I will be watching commodity prices closely to see how this will ripple across the inflationary landscape. With the S&P approaching a 20% decline – or the definition of a ‘bear market’ – I anticipate further volatility and irrational market behavior.

Experience tells me that patience and persistence are the best courses of action, especially when others are deviating.

 

  • At the time of this writing the Joule dividend model held shares of TGT, KO, & PG