Financial News: If It Bleeds, It Leads!
When I toiled as a reporter on daily newspapers, we had a saying in the newsroom: “If it bleeds, it leads!” Which is to say, the worst news should get the most intense coverage.
Human beings are hardwired to be more attentive to bad news; it’s a survival trait honed by evolution. Accordingly, the media amplify bad news and underplay good news.
To be sure, stocks took a beating Tuesday, with the S&P 500 falling more than 4%. However, lost amid all the media handwringing is the fact that equities remain well above their June lows.
From its bottom on June 17 to August 16, the S&P 500 gained 17.4%. If you include dividends, the index returned 17.7%. That’s a hefty two-month return, but it hasn’t generated much in the way of headlines.
As I write this article on Wednesday, I have the flat-screen television in my home office turned to CNBC, and from the fraught demeanor of the “news” hosts, you’d think we’d just gone through October 29, 1929.
Yes, Tuesday’s stock market rout was brutal, with equities plunging across the board to hand investors the bear market’s biggest one-day loss. The culprit for the selloff was a hotter-than-expected inflation report for August.
But I view Tuesday’s sharp decline as a quick fear-based swoon, rather than the start of a fundamental breakdown. Sure enough, stocks stabilized the next day.
The major U.S. equity benchmarks closed higher Wednesday as follows: the Dow Jones Industrial Average +0.10%; the S&P 500 +0.34%; the tech-heavy NASDAQ +0.74%; and the small-cap Russell 2000 +0.38%.
Let’s take a clear-eyed look at where the markets stand and why you shouldn’t panic.
The U.S. Bureau of Labor Statistics reported Tuesday that the Consumer Price Index for All Urban Consumers (CPI-U) rose 8.3% over the past 12 months, higher than expected but lower than the four-decade 8.5% peak reached in June.
This CPI report sent stocks into a tailspin, due to fears of an aggressively hawkish turn in monetary policy. But the fact is, Federal Reserve Chair Jerome Powell had already reiterated the central bank’s determination to boost interest rates and shrink the Fed’s balance sheet. The Fed is still likely to hike rates by 75 basis points (bps) at its meeting next week. That scenario has been cemented, not changed.
We’ll probably see two additional 50 bps rate hikes in November and December. Powell and his cohorts remain committed to curbing inflation, even if higher rates result in a weaker jobs market and economy. But Powell has been upfront about his intentions, to avoid spooking the markets.
September and October are historically tough months for the stock market, so brace yourself for continued volatility in the weeks ahead.
Less pain at the pump…
Inflation remains far above the Fed’s target of 2%, but factors still suggest an eventual easing of inflation, albeit not as fast as we’d like.
The economy as a whole, and inflation, are critically sensitive to any shift in global energy prices. Energy heats homes, powers factories, and fuels cars, trucks and planes.
On the inflation front, it’s encouraging that the per-barrel price of U.S. benchmark West Texas Intermediate (WTI) has fallen below $90, amid projections of reduced energy demand due to a slowing economy.
In an energy trend that also carries political significance, gasoline prices have plunged. U.S. gasoline prices soared after Russia invaded Ukraine in late February, but have recently declined to pre-invasion levels (see chart).
The national average for unleaded gas has declined all summer, to an average of $3.70 per gallon as of Wednesday.
The run-up in gasoline prices generated a lot of frenzied media coverage, as well as political demagoguery, but the decline has been largely ignored. As my newsroom managing editor would often say about good news: “Boring! Bury it.”
Regardless, less pain at the pump has brightened the inflation picture.
According to the New York Federal Reserve’s latest inflation survey, released Monday, three-year inflation expectations dropped to 2.8% in August from 3.2% the previous month. U.S. inflation is expected to average 5.7% for all of 2023 and shrink to 2.8% three years out, largely thanks to falling gasoline prices.
Other factors point to good news on inflation. Supply-chain disruptions have been waning, as indicated not just by cheaper shipping costs but in declining prices of certain goods that had been temporarily scarce, particularly used cars.
On Wednesday, we got new inflation numbers that support the positive narrative on inflation. The BLS reported that the Producer Price Index (PPI) declined by 0.1% in August on a monthly basis, in line with expectations. The “core” PPI, which excludes food, energy, and trade services, edged higher by 0.2%. The consensus had expected an 0.3% increase in the core PPI.
The headline PPI rose 8.7% on a year-over-year basis, which isn’t as bad as it seems because it represents a big drop from the 9.8% increase reported for July. The core PPI rose 5.6% year over year. Because it measures wholesale prices, the PPI is considered a leading indicator and a reliable harbinger of future inflation reports.
At its meeting next week, the U.S. central bank is unlikely to hike rates beyond 75 bps (0.75%). Powell has been intent on proving his credibility as an inflation fighter, but by the same token, he wants to avoid further unnerving financial markets worldwide.
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John Persinos is the editorial director of Investing Daily.