Wow, wild swings. We wrote on January 6th,
Will the current sell-off morph into a Wiley E. Coyote moment and drive stocks over a cliff allowing them to fall to fair value, which, for most, is much lower? We seriously doubt it until the Fed begins to remove lots of the stimulus and tighten monetary conditions. – GMM
Almost every big move this young year seems that traders were way offside.
We expect volatility to remain high before a new trend is established, which will come when the Fed starts tightening the screws, if, and a big if the Board has the spine, which we have our doubts.
The big moves last Friday and Monday (see chart below) may have been the shy tone that several Fed officials expressed earlier this week about the willingness to go to war on inflation.
Nevertheless, the wage/price spiral is accelerating. Take a look at Amazon after their earnings release today. Management announced that Prime membership fees would increase by $20, almost 20 percent, which we expect is to help offset their rising labor costs.
Amazon has well over 200 million Prime members, and it’s estimated that 60-70 percent of American adults are members. Inflation coupled with accommodative monetary policy is good for stocks in the short term, and Amazon’s stock is up over 15 percent in after-hours trading.
The longer the Fed waits or is too slow, however, inflation digs its roots deeper into the economy, and the more pain will be inflicted from the coming tightening cycle.