Stock Market News: Inflation and Recession Fears Don’t Stop Rally

The stock market is rising again Tuesday, continuing a choppy pattern where nothing changes much despite tons of movement. Meanwhile, some investors think the recession is already here.

Stocks rallied on Tuesday after falling Monday, continuing an endless choppy pattern that has frustrated investors for months. The S&P 500 added around 0.6% just after the opening of trading. The Nasdaq and Dow Jones also posted modest gains, shaking off some losses from yesterday. Gas prices remain a primary concern for US consumers, as the price of crude oil jumped above $111 briefly.

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Elsewhere in the market, some investors are sick of riding the stock roller coaster and are hedging their bets in Treasury bonds. The ten-year Treasury bond yield is now hovering around  3.25%, getting close to last week’s recent highs. Regulators in the US say their main priority now is getting inflation down, even if it comes at the cost of economic growth. As such, a recession could be looming for the US.

Read More: Check out the latest Mind Your Dollars stock and financial news.

Some experts now say that the US is already in a recession. Cathie Wood of ARK Invest told reporters that her firm “think[s] we are in a recession.” Wood added, “We think a big problem out there is inventories… the increase of which I’ve never seen this large in my career. I’ve been around for 45 years.”

Supply Chains and Geopolitical Tensions

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Numerous factors have kept inflation running red-hot this year. The ongoing war in Ukraine has contributed, along with supply chain disruptions resulting from lockdowns. Many companies, unwilling to see a hit to their bottom lines, have hiked their prices to keep up with higher labor costs and shipping fees. This has coalesced into the worst US inflation since the early 1980s. 

“We were wrong on one thing and that was inflation being as sustained as it has been,” Wood went on. “Supply chain … Can’t believe it’s taking more than two years and Russia’s invasion of Ukraine of course we couldn’t have seen that. Inflation has been a bigger problem but it has set us up for deflation.”

With spending slowing and many Americans tightening their belts, some could say the recession has already started. It’s difficult for most households to stomach discretionary spending when gas costs $5 per gallon and groceries continue to increase in price. Some workers have even started to hope for a recession as a way to cool off demand and allow inflation a chance to slow down. 

Choppy Pattern to Continue

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Many investors have expressed frustration with the current market dynamic, as stocks haven’t performed well enough for bulls or tanked low enough for bears. It’s tough to make money on the stock market when things are this choppy. “I think we’re gonna have a second half that’s frustrating the bulls and frustrating the bears, bouncing around a bunch as we kind of digest the economy slowing,” says Crossmark Global Investments’ chief investment officer Bob Doll

“How much of an effect does that have on earnings? Maybe we get a little better inflation news so the [price-earnings ratio of the S&P 500] doesn’t get threatened as much. But we’re moving from a period where it’s all been about PEs multiples declining. And we’re moving to a period where I think the earnings are gonna be watched more carefully than the PE.”

Many companies are now gearing up to reveal their quarterly earnings for the second quarter of 2022. This will offer investors a glimpse into how the biggest corporations are handling persistent inflation and higher labor costs. If they’re navigating this turbulent era well, then investors might see some relief bounces in the coming weeks. However, if it’s more bad news, some analysts fear it could lead to a worse economic downturn.

Inflation Might Solve Itself

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Some market experts now believe that inflation could run itself out, with or without the Federal Reserve’s intervention. While the Fed is scrambling to raise interest rates to slow the rate of monetary devaluation, other patterns could crush inflation in the next few months. “[It] increasingly looks like markets mistook [the] ‘bullwhip’ effect of [the] supply chain (including food) for secular inflation,” says Tom Lee, head of research for Fundstrat.

That “bullwhip effect” Lee mentioned is a major driver of short-term inflation. It refers to the tendency of businesses to miscalculate the amount of inventory they need to meet consumer demand, whether they overestimate or underestimate the needs of customers. This can result in a negative pattern where businesses struggle to keep up with demand or otherwise have to flood the market with overstocked goods.

This year, retailers have over-ordered by a large margin. Suppliers have provided far too many goods, and companies like Target and Walmart will need to figure out how to offload this inventory. “I do not believe companies want to permanently carry higher inventory. It is expensive … and introduces huge balance sheet risk,” Lee explains. “Thus, companies will want to trim inventories when supply visibility improves. The logical implication, for me, is prices will come down.”

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