Worries about inflation are sending stocks down again.
The Personal Consumption Expenditures (PCE) index, which the Federal Reserve considers the best inflation measure, rose to 0.6% for January; prices are up 4.7% over the last year.
High inflation will force the Fed to keep raising interest rates and keep them high all year.
The Inflation Monster Is Keeping Stocks Down
Falling commodity prices in 2022 led many investors to believe inflation could be tamed without a recession. But oil executives are now predicting another run at $100/barrel, farm commodities remain stubbornly high, and many service costs are rising.
The initial reaction is to sell stocks and look to bonds for income. In pre-market trading, shares in the largest companies are down 1%, and those in the technology sector are down 1.4%.
Bankers like JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon now worry that the Federal Reserve has lost control over inflation. Fed minutes, issued Feb. 22, show a consensus for continued rate hikes, with some governors urging a 50 basis point hike this month. The Fed eventually settled on a 25 basis point hike.
If market interest rates rise to 5%, investors could get a price-to-earnings ratio of 20 on government bonds. This will compress the PE for stocks, which is now 21.6. Rising costs also put pressure on earnings. Earnings estimates are also falling.
Earnings pressure and high interest rates are leading to a “flight to quality.” Defensive names that have pricing power are now favored. Consumers are also more worried about the economy. This gives those predicting a stock market crash and imminent depression an audience.
What Happens Next?
It’s going to be another bad day at the dog track.
Stocks will likely fall toward their mid-January lows, with aggressive traders going short, even on names like General Electric (NYSE:GE). Bond yields are also rising. You can get 4.76% for your money right now on a 2-year government bond.
On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
