Stocks Week Ahead: How Long Will Inflation Last? The answer is in the past
So the central bank broke with “transient” and set its sights on a new inflation-altering term: entrenched.
It is unclear what exactly entrenched inflation looks like or how we will know if we have reached it. The Fed has given very little guidance in general on how long it expects its interest hikes to reduce inflation. “It’s a very difficult environment trying to give forward guidance 60, 90 days ahead,” Powell said last week. “There are so many things that can happen in the economy and in the world.”
Looking back: A look into the past might provide some insight: although prices have been relatively stable over the past four decades, sharp fluctuations were not uncommon before the early 1980s.
In the 1970s, the United States experienced its longest period of increased inflation. President Richard Nixon took the dollar off the gold standard and two spikes in oil prices pushed inflation rates to 12.3% by the end of 1974. The Fed began practicing a “stop -go”, increasing benchmark rates by as much as 16%, then quickly fell. again, leading to a cycle in which rising interest rates were not sustained long enough to end inflation or increase growth.
In the late 1970s, Federal Reserve Chairman Paul Volcker took over and ended this policy. He raised rates and kept them high until inflation subsided, plunging the United States into recession (his second of the decade) but ultimately lowering inflation rates permanently, where they are. remained for the next 40 years.
“I have great admiration for [Volcker]”Powell said last week when asked about his policy changes. “He had the courage to do what he thought was the right thing.
Analysts often talk about the stagflation fears of the 1970s and compare our current situations, but today’s inflation is caused by a mix of global crisis, supply chain disruptions and growing consumer demand after Covid lockdowns crippled the economy.
Yet, as growth slows and markets fall, the two S-phrases – stagflation and sticky inflation – are thrown around with increasing frequency.
Some investors think the answer is 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 statement. “There is tentative evidence of relief from supply chain challenges and we anticipate a ‘two steps forward, one step back’ process next year.” But it won’t be a decade-long struggle, they predict. Prices are expected to start falling by 2023.
Is Google an oasis of greenery in the great technological sinking?
The forward-thinking tech sector is particularly vulnerable to higher rates: Investors expect tech companies to post electric growth, but inflation and higher interest payments will eat away much of those earnings .
But not all companies will be affected equally by the great tech disaster of 2022, analysts say. Many see Google as an oasis of green in a desert of red.
“Google has weathered a few recessions before and has held up pretty well,” said Raymond James analyst Aaron Kessler. “Usually the last thing advertisers cut is their Google spend.”
The numbers add up: Google Search growth remained solid at 24% in the first quarter, and Google Cloud revenue grew 44% over the same period. YouTube’s ad revenue fell short of expectations as European advertisers pulled out at the start of the Russian invasion of Ukraine, but YouTube’s scale remains unmatched with more than 2 billion monthly active users . More than a third of YouTube viewers are not reached by any other ad-supported streaming service.
Alphabet has more stable business than its peers, Bank of America analysts wrote in a recent note. It also outperforms AI and machine learning products, has great spending flexibility, and a management team that does more for shareholders than other companies.
About these shareholder benefits: Alphabet isn’t afraid to scratch its shareholders’ backs, the company has repurchased $52 billion of stock in the past 12 months, and the board has authorized the repurchase of 70 billions of additional dollars.
Cheaper stocks mean smaller retail investors can flood the stock, pushing prices up further. More liquidity generally means more protection against extreme fluctuations, and a split signals to investors that a company is thriving and sought after by shareholders.
Kessler warned that Google is not immune to headwinds hurting other companies. “We expect slower growth this year than last year,” he said.
But over the long term, Kessler said, “we think Google probably has the strongest fundamentals in large-cap internet names.”
Monday: the Federal Reserve Bank of New York’s April survey of consumer expectations; Profits from Palantir, Tyson Foods and Duke Energy
Tuesday: April NFIB Small Business Optimism Index; Earnings from Sysco, Coinbase and Electronic Arts
Wednesday: April consumer price index; Energy Information Administration State of Oil Report; Earnings from Disney, Warby Parker and Beyond Meat
Thusday: Weekly jobless claims; April producer price index final demand; Earnings from Motorola and Tapestry
Friday: April import and export prices; University of Michigan Consumer Sentiment