Stocks a week in advance: How long will inflation last? The answer lies in the past

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Therefore, the central bank broke with the “transient” and looked at a new term that modifies inflation: rooted.

“Our job is to ensure that inflation of this unpleasant high nature does not take root in the economy,” Fed President Jerome Powell said last Wednesday, just after announcing a half-point increase in interest rates to curb inflation.

It is unclear exactly what rooted inflation looks like or how we will know if we have reached it. The Fed has generally given very little guidance on how long they predict they will need to raise interest rates to reduce inflation. “It’s a very difficult environment to try to give guidance 60, 90 days in advance,” Powell said last week. “So many things can happen in the economy and around the world.”

There is nothing investors hate more than uncertainty, and as rising rates hit U.S. markets, they want more guidance. Americans, who have been hit hard by rising gas and food prices, also want to know when they will finally feel relief, especially if a rise in Fed rates risks dragging the economy into recession.

Looking back: A look at the past might offer some insight: although prices have been relatively stable over the last four decades, major changes were not uncommon before the early 1980s.

History (and Fed data) shows that the driver of inflation is important in predicting when rates will finally fall: prices rose at very fast rates during World War I and World War II as a result of wartime restrictions, but fell again in peacetime continued.

In the 1970s, the United States experienced the longest period of increased inflation. President Richard Nixon removed the dollar from the gold standard and two jumps in oil prices pushed inflation rates to 12.3% by the end of 1974. The Fed began to practice “stop-go” monetary policy, raising reference rates as high as 16% and then rapidly fell again, leading to a cycle in which increased interest rates were not sustained long enough to halt inflation or increase growth.

A recession may be around the corner. Don't panic

By the late 1970s, Federal Reserve President Paul Volcker had taken over and ended that policy. He raised rates and kept them high until inflation went down, throwing the U.S. into recession (the second in a decade), but finally permanently lowering inflation rates, where they remained for the next 40 years.

“I have a huge admiration [Volcker]”Powell said last week when asked about his policy changes.” He had the courage to do what he thought was the right thing to do. “

Looking ahead: So, will it take almost 20 years and two recessions to get back to normal? Powell certainly doesn’t think so. The economy is strong and unemployment figures don’t look exactly like they did in the 1970s, Powell said. Many believe that we have already reached the peak of inflation and that the figures are starting to decline.

Analysts often talk about fears of stagflation in 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 the Covid blockade stopped the economy.

“The post-World War II inflation period is probably a better comparison to the current economic situation than the 1970s and suggests that inflation could fall rapidly once supply chains are fully online and when accumulated demand subsides,” the White House Economic Council wrote. Advisors in the recent White Paper.

However, as growth slows and markets fall, the two S phrases – stagflation and sticky inflation – are becoming more common.

Some investors think the answer is in the middle.

“We expect inflation to slow in the U.S. over the next two years, but progress will be very uneven,” Bank Of America analysts wrote in a recent no. “There is trial evidence to mitigate supply chain challenges and we expect a ‘two steps forward, one step back’ process next year.” But this will not be a decade-long struggle, they predict. Prices should start to decrease by 2023.

Is Google a green oasis in a big technological wreck?

It’s been a few bad weeks for technology stocks, but analysts are still interested in at least one name: Google parent company Alphabet (GOOGL).
Technology titans have fallen victim to rising rates and low earnings this spring. PayPal, Amazon, Facebook parent company Meta Platforms and Netflix experienced a nasty spill in April, and the Nasdaq had its worst month in nearly 14 years.

The technology sector thinking about the future is particularly sensitive to higher rates: investors expect technology companies to grow electricity, but inflation and higher interest rates will take a big bite out of that profit.

But not all companies will be equally hurt by the big technological wreck of 2022, analysts say. Many see Google as a green oasis in the red desert.

“Google has already endured several recessions and has held up pretty well,” said Raymond analyst James Aaron Kessler. “Usually, the last thing advertisers reduce is their spending on Google.”

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 advertising revenue fell below expectations as advertisers in Europe withdrew at the start of the Russian invasion of Ukraine, but YouTube’s scale remains unmatched with more than 2 billion active users per month. More than a third of YouTube viewers are not reached by any other ad streaming service.

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

About these shareholder benefits: Alphabet has nothing against scratching its shareholders, the company has bought back $ 52 billion in shares over the past 12 months, and the board has approved the purchase of an additional $ 70 billion.

Management also announced earlier this year that shares of Alphabeta will be split 20 to 1 in early July.

Cheaper stocks mean smaller smaller investors can overwhelm stocks, further raising prices. More liquidity usually means greater protection from extreme change and division signals to investors that the company is thriving and that shareholders are in demand.

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

But in the long run, Kessler said, “we think Google probably has the strongest foundation in big-name Internet names.”

Following

Monday: April Consumer Expectations Survey Federal Reserve Bank of New York; Earnings 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; Oil Information Report of the Energy Information Administration; Earnings from Disney, Warby Parker and Beyond Meat

Thursday: Weekly unemployment claims; april producer price index final demand; Earnings from Motorola and Tapestry

Friday: April import and export prices; University of Michigan consumer sentiment

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