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7 charts from the past week that tell an interesting story in markets and investing…
1) A Year of Rising Inflation
Consumer prices in the US increased 7% over the last year, the highest rate of inflation since 1982.
Here’s a breakdown of price increases from the latest CPI report:
- Gasoline: +49.6%
- Fuel Oil: +41.0%
- Used Cars: +37.3%
- Gas Utilities: +24.1%
- Meats/Fish/Poultry/Eggs: +12.5%
- New Cars: +11.8%
- Overall CPI: +7.0%
- Food at home: +6.5%
- Electricity: +6.3%
- Food away from home: +6.0%
- Apparel: +5.8%
- Transportation: +4.2%
- Shelter: +4.1%
Of all these categories, the most surprising has been the sustained price increases in used cars and trucks, which are 37% higher than a year ago. Nearly everyone thought that the supply/demand imbalance would have abated by now, but it hasn’t happened just yet.
2) What’s the Actual Inflation Rate?
7% was the reported US inflation figure but there’s strong evidence pointing to the actual number being much higher.
33% of the CPI index is in the “shelter” (housing) category, which was estimated to have increased only 4.1% over the last year.
What’s the problem with that number?
Actual rents in the US were up 17.8% in 2021, the highest increase on record.
And US home prices were up 19% year-over-year, which would also be the largest annual increase ever (note: we only have data thus far through October).
3) Will Anything Slow Rising Prices?
That is the question everyone is asking, and as it pertains to the booming housing market, the answer is most certainly interest rates.
On that front, the 30-year mortgage rate in the U.S. rose to 3.45% last week, its highest level since March 2020. Only a year ago it hit an all-time of 2.65%.
4) The Beginning of the End of Easy Money
Why are mortgage rates finally moving higher?
They are losing the artificial support of the Federal Reserve, who started slowing down their purchases of mortgage bonds last December and are expected to end all quantitative easing by March.
Additionally, the Fed is now expected to hike rates 4 times this year, with a year-end Fed Funds Rate of 1.00-1.25%. The bond market is quickly repricing to this new reality, with yields racing back to pre-pandemic levels.
To be sure, even with 4 rate hikes monetary policy could hardly be described as restrictive, but this is an important change nonetheless: the beginning of the end of easy money is here.
5) Biotech Bear
Rising interest rates and the prospect of Fed tightening continues to wreak havoc on high growth sectors.
Biotech stocks ($XBI ETF) are at the top of that list and are now over 42% from their high last February, their largest drawdown since 2015-16.
The relative weakness in Biotech stocks versus the Nasdaq 100 is notable…
Along the same lines is the leading high growth ETF (ARK Innovation, $ARKK), which is now down over 50% from its high in February 2021.
At its peak last February, the ARK Innovation ETF was up 754% since its inception in 2014 vs. a gain of 261% for the Nasdaq 100. Today, most of that gap has been closed with $ARKK up 330% since inception vs. a 302% gain for $QQQ.
6) Free Money Lessons
US Retail Sales ended the year on a weak note, falling 2.1% in December before adjusting for inflation and -2.5% in inflation-adjusted terms. This was likely due in no small part to reduced travel and leisure activity from the exponential spread of the Omicron variant. But there are also signs that consumers may be starting to hold off on discretionary purchases given the sharp rise in prices and wages that are now failing to keep pace with inflation.
The weak December readings, however, stood in sharp contrast to what can only be described as a boom year for sales…
- Retail Sales rose 14.4% in 2021, the highest annual increase on record.
- Real Retail Sales (inflation-adjusted) rose 6.8% in 2021, the 2nd highest increase after 1999.
Lessons we learned from this experiment: if you give the American consumer free money, they will spend it … and with a lag, inflation will rise.
7) Peak Covid
The Omicron wave in New York has peaked and the rest of the country will soon follow. It only gets better from here.
Have a great week everyone!
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