Stock Slideshows Show Inflation Worrywarts Was Right

(Bloomberg) – Inflation has had an ambiguous influence on equities at best this year, bearish in its impact on policy while being bullish as an economic signal and because it increased sales without squeezing margins. Wednesday was a rare victory for the worried.

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Stocks sold after the biggest rise in consumer prices since 1990. The Nasdaq 100 fell more than 1% to its worst drop in a month, while higher-valued stocks took the brunt of the sell-off . A basket of unprofitable technology companies from Goldman Sachs Group Inc. fell about 4%, the most in a month.

Admittedly, the pullback followed weeks of relentless gains in which the S&P 500 rose in 17 of 19 sessions through Monday, the best run since 1971. After the rally took in almost everyone a bull, it doesn’t take much for the market to change course. . And while American businesses have pushed inflation to record profits, the specter of persistent inflation and higher interest rates is something investors don’t like.

According to Quant Insight, a London-based analytical research firm that studies the relationship between asset prices and two dozen macroeconomic factors, the S&P 500 showed negative sensitivity to rising inflation expectations last month for the first time. times in three years.

“I feel like investors are discounting high growth stocks more today as inflation remains sizzling,” said Mike Bailey, director of research at FBB Capital Partners. “There could also be a bit of remorse on the part of buyers for growth and tech stocks after seeing a sharp increase in sentiment over the past month,” he added. “Now buyers of tech and growth are worried that the wrong mix of inflation and higher rates along with expensive valuations will cause bad news to come.”

Investors sought safety in safe-haven stocks like utilities and consumer staples as CPI data rocked the bond market, with a measure of inflation expectations reaching an all-time high. As traders accelerated estimates of when the Federal Reserve will raise its benchmark interest rate to curb inflation, the US dollar has surged.

What sets Quant Insight apart is an approach that eliminates all other macro factors while analyzing the impact of a factor. Using a tool known as principal component analysis, the company studies inflation expectations – as measured by Treasury bond inflation swaps – and their influence on the market. fellow in isolation. And the message is clear: inflation is no longer the ally of bulls in equities. The two indices that track European and American equities have seen their sensitivity to inflation turn negative.

The data is a rebuttal of those who say the stock market is immune to a force that has undermined the confidence of the average American. Yes, the S&P 500 has hit near record highs even as consumer confidence has plunged to pandemic lows. But a closer look shows that the market is tuned in to inflation concerns more than one might think.

“They don’t like rising inflation expectations anymore,” said Colin Stewart, Americas manager for Quant Insight. “The psychology of Main Street and Wall Street in sync. “

Like many things in the post-pandemic era, it is unclear whether the stock market will continue to view inflation as a threat. Even after a two-day decline, the S&P 500 hovered around its all-time high and data from Quant Insight showed that other elements such as business credit and market liquidity have always acted as a more driving force. important for the S&P 500.

But here’s a caveat: If inflation angst worsens and stocks sell off, the market’s reliable savior – the Fed – might not be able to come to the rescue.

“Rate hikes may not be enough to reverse inflation, as the sources of inflation involve supply chain bottlenecks and budget spending, which are two areas the Federal Reserve does not control.” said Nancy Davis, founder of Quadratic Capital Management.

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