Stocks for the week ahead: how long will inflation last? The answer lies in the past

Thus, the central bank abandoned the term “temporary” and turned its attention to a new term that changes inflation: “entrenched”.

“Our job is to ensure inflation of this nasty high nature doesn’t take root in the economy,” Fed Chairman Jerome Powell said last Wednesday, just after he announced a half-point rate hike to fight inflation.

It is not clear exactly what entrenched inflation looks like and how we will know if we have reached it. The Fed has generally given very little guidance on how long they predict it will take for higher interest rates to bring down inflation. “It’s a very difficult environment to try and give a forecast 60, 90 days ahead,” Powell said last week. “There are so many things that can happen in the economy and around the world.”

There is nothing investors hate more than uncertainty, and as the rate hike hits the US markets, they want more information. Americans, who have been hit hard by rising gas and food prices, also want to know when they can finally feel some relief, especially if the Fed’s rate hike risks sending the economy into recession.

Looking back: A look into the past can provide some insight: while prices have been relatively stable over the past four decades, large fluctuations were not uncommon until the early 1980s.

Story (and Fed data) show that the driving force behind inflation is important in predicting when rates will finally come down: prices rose at a very rapid pace during World Wars I and II as a result of wartime restrictions, but fell again when peacetime resumed.

In the 1970s, the United States experienced its longest period of elevated inflation. President Richard Nixon took the dollar off the gold standard, and two oil price hikes pushed inflation up to 12.3% by the end of 1974. them again, leading to a cycle in which higher interest rates were not sustained long enough to end inflation or boost growth.

By the late 1970s, Federal Reserve Chairman Paul Volcker took charge and ended the policy. He raised rates and held them high until inflation eased, plunging the US into a recession (the second in a decade), but in the end, permanently lowering the inflation rate at which it remained for the next 40 years.

“I have great admiration [Volcker]”, Powell said last week when asked about the change in his policy. “He had the guts to do what he thought was right.”

Looking ahead: So, will it take almost 20 years and two recessions to get us back to normal? Powell, of course, doesn’t think so. The economy is strong, and unemployment data looks nothing like it did in the 1970s, Powell said. Many believe that we have already reached the inflationary peak, and the numbers are starting to level off.

Analysts often talk about the stagflation fears of the 1970s and compare our current situations, but today’s inflation is caused by a combination of the global crisis, supply chain disruptions and rising consumer demand after Covid restrictions brought the economy to a halt.

“The post-World War II inflationary period is probably a better comparison for the current economic situation than the 1970s, and suggests that inflation could quickly come down once supply chains are fully connected and pent-up demand levels out.” writes the White House Economic Council. Advisors in a recent white paper.

However, as markets slow down and fall, the two S-phrases — stagflation and sticky inflation — are becoming more frequent.

Some investors believe the answer lies in the middle.

“We expect US inflation to slow over the next two years, but progress will be very uneven,” Bank Of America analysts wrote in a recent note. “There is preliminary evidence of supply chain problems easing, and we expect the next year to see the ‘two steps forward, one step back’ process implemented. But it won’t be a ten-year struggle, they predict. Prices should start to decline by 2023.

Is Google a green oasis in the midst of a great technological disaster?

It’s been a bad few weeks for tech stocks, but analysts are still interested in at least one name: Google’s parent company. Alphabet (google).
This spring, the tech titans have been the victims of rising rates and low profits. PayPal, Amazon, Facebook’s parent company Meta Platforms and Netflix suffered nasty spills in April, and Nasdaq had its worst month in almost 14 years.

The up-and-coming tech sector is especially vulnerable to higher rates: Investors expect tech companies to see electric growth, but inflation and higher interest payments are hurting those gains.

But not all companies will be hit equally by the great tech crash of 2022, analysts say. Many see Google as a green oasis in the red desert.

“Google has been through several recessions and has done pretty well,” said Raymond James analyst Aaron Kessler. “Usually the last thing advertisers cut is spending on Google.”

The numbers add up: Google Search growth remained steady at 24% in the first quarter, while Google Cloud revenue increased by 44% over the same period. YouTube ad revenue fell below expectations as advertisers in Europe retreated at the start of the Russian invasion of Ukraine, but YouTube’s scale remains unrivaled with over 2 billion monthly active users. More than a third of YouTube viewers are not reached by any other ad-supported streaming service.

Alphabet has a more stable business than its competitors, Bank of America analysts wrote in a recent note. It also outperforms other companies in artificial intelligence and machine learning products, has significant spending flexibility, and has a management team that does more for shareholders than other companies.

About these shareholder benefits: Alphabet doesn’t mind scratching the back of its shareholders, the company has bought back $52 billion worth of shares in the past 12 months, and the board of directors has authorized buybacks of an additional $70 billion.

Management also announced earlier this year that Alphabet shares would be split 20-to-1 in early July.

Cheaper stocks mean that smaller retail investors can pour into stocks, pushing prices up even more. More liquidity usually means more protection from wild swings, and splits signal to investors that the company is thriving and in demand by shareholders.

Kessler warned that Google is not immune to headwinds hurting other companies. “We do expect slower growth this year than we saw last year,” he said.

But over the long term, Kessler said, “we think Google probably has the strongest fundamentals in big-cap internet names.”

Next

Monday: the April survey of consumer expectations by the Federal Reserve Bank of New York; Income from Palantir, Tyson Foods and Duke Energy

Tuesday: April NFIB Small Business Optimism Index; Income from Sysco, Coinbase and Electronic Arts

Wednesday: consumer price index for April; Energy Information Administration Oil State Report; Revenue from Disney, Warby Parker and Beyond Meat

Thursday: Weekly jobless claims; Producer price index for April: final demand; Income from Motorola and Tapestry

Friday: Import and export prices in April; University of Michigan Consumer Sentiment

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