Inflation, Recession, Stagflation - A Recipe for Volatility

Inflation, Recession, Stagflation- A Recipe for Volatility
 

Uncertainty is the stock market’s worst enemy. In mid-May 2022, the market faces rising interest rates, a strong dollar, the first major war in Europe since World War II, supply chain bottlenecks, lockdowns in China, tensions and hostility between nuclear powers, and a host of other issues.

Markets reflect the economic and geopolitical landscapes, which are nothing short of a mess. Increasing inflationary pressures and the rising recession risks are not mutually exclusive. Alone, each is a challenge; together, the impact on stocks and other markets could be exponentially problematic. The US central bank employs monetary policy tools to counter inflation and recessions independently. The tools address the economy’s demand side. However, the toolbox has few answers for stagflation and factors affecting the economy’s supply-side.

Stocks have been trending lower as investors, traders, and all market participants are worried about the future. The stock market does not climb but falls on a wall of worry.

The worst inflation since the early 1980s

• CPI and PPI data for March was the highest since the early 1980s
• CPI for April remained elevated at 8.3% with PPI at 11%
• Real interest rates remain negative, fueling inflation

Recession fears increase as GDP declines

• First-quarter 2022 GDP fell 1.4%
• Two consecutive quarters of declining GDP is an official recession
• Economic conditions remain uncertain and sluggish

Stagflation is the worst of both worlds

• Inflation + Recession = Stagflation
• Central banks have mutually exclusive tools for rising prices and economic slowdowns
• Stagflation creates competing problems for the Federal reserve

Geopolitics is at the center of the stage

• The war in Ukraine, sanctions on Russia, and Russian retaliation create are distorting prices
• The “no-limits” cooperation between China and Russia creates mounting economic and geopolitical tensions with the US and Europe
• The geopolitical bifurcation between nuclear powers divides the world and destroys the potential for global cooperation

The Fed slept in 2021 - In 2022, the market has lost some faith in the central bank

• The Fed and administration had the opportunity to address inflation in 2021
• The first major European war since WW II in 2022 creates supply-side issues for the global economy
• The Fed and central banks have demand-side monetary policy tools- There are few tools to address supply-side problems
• Volatility in the stock market and markets across other asset classes signal a lack of faith in the US Federal Reserve
• Expect price variance to continue

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!