We are in an environment where stagflation has taken hold and is quickly unfolding, an environment of slowing economic growth and inflation.

Economic data continues to be ambiguous and conflicting. Publicly traded company earnings are accurate while government data is nebulous and misleading at times. This started during the pandemic, when most government agencies ceased doing face to face surveys and data gathering (Labor Dept., USDA, Social Security), to name a few.

A tremendous focus on company earnings, not government data, is developing, whereas more credibility is being given to earnings than government data. Earnings can give us (the market and investors) a much better sense of what is actually occurring. What this means is that a disconnect, which already exists, will just become much more apparent as earnings are released in July.

Companies nationwide are starting to report huge build ups in inventory, meaning that companies such as Walmart, Target, Home Depot, and even some of the autos will eventually have a lot to sell but, to consumers demanding less. A large scale inventory build up also means big discounts to come on items such as furniture, construction materials, electronics, apparel and some cars.

So second quarter company earnings (April, May, June) due to begin releasing in July may prove to be disappointing, all due to inflation, rising inventories, less consumer demand, and rising labor costs, which will have filtered through to earnings by then. The only benefactors will be essential product companies that sell what we need, not want.

Those same essential product companies are getting away with passing higher costs along to consumers in the form of higher prices. Many of these companies, flush with cash, are simply returning that cash to stockholders in the form of increased dividends.

Markets are in somewhat of a holding pattern and essentially have been for weeks, waiting for 2nd Qtr earnings to release. Day to day volatility obscures where the market is headed, basically no where for now, as the S&P 500 has traded within a 100 point range (up and down) for the past month.

I do believe that July will be a catalyst for further market downturn in tech, commodities, building materials, manufacturing, but a “hold” for all consumer staple stocks (the essential product companies).

The fall months will lead into a more recessionary environment along with deflation, essentially when pricey or overvalued assets begin to fall in price, including houses, cars, art, and stocks. We will also start to see a pullback in interest rates, perhaps with the Fed even changing its course, especially heading into elections. Lower rates and deflation bode well for bonds, with yields falling and bond prices heading higher.

That’s it for now.

Thanks.

Alex
AGG Asset Management LLC
805.496.3344