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

So the central bank has broken up with “transitory” and set its eyes on a new inflation-modifying term: entrenched.

“It’s our job to make sure that the inflationary high nature of the inflation doesn’t get entrenched in the economy,” said Fed Chair Jerome Powell last Wednesday.

It’s unclear what exactly entrenched inflation looks like or how we’ve reached it. The Fed has given little guidance in general on how long they will take their interest hikes to lower inflation. “It’s a very difficult environment to try and give guidance 60, 90 days in advance,” said Powell last week. “There are just so many things that can happen in the economy and around the world.”

In the US markets, they want more guidance. Americans, who have been hard-hit by rising gas and food prices, may also want some relief, especially if the Fed’s rate hikes risk dragging the economy into a recession.

Looking back: Some of the insights: Although prices have been steady over the past four years, large swings were not uncommon before the early 1980s.

History (and Fed data) show that the driver’s inflation is important in predicting when rates will drop: Prices grew at very rapid rates as World War I and World War II as a result of war-time constraints, but fell again resumed.

In the 1970s, the US experienced its longest stretch of heightened inflation. President Richard Nixon removed the dollar from the gold standard and two surges in oil prices at 12.3% by late 1974. The Fed began practicing “stop-go” monetary policy, raising benchmark rates to as high as 16% and then quickly dropping. They are again, leading to a cycle in which increased interest rates have not sustained long enough to end inflation or growth.

By the late 1970s, Federal Reserve Chair Paul Volcker took over and ended that policy. He raised rates and kept them high until inflation came down, throwing the US into recession (its second decade) but ultimately permanently lowering inflation rates, where they remain for the next 40 years.

“I have for tremendous 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 nearly 20 years and two recessions to get us back to normal? Powell sure doesn’t think so. The economy is strong and the unemployment data looks nothing like it did in the 1970s, Powell said. Many believe that we’ve already reached an inflationary peak and the numbers are flat to the beginning.

Analysts often speak of the fears of the 1970s stagflation and compare our current circumstances, but today’s inflation is caused by a mixture of global crisis, supply chain disruptions and growth in consumer demand after Covid-lockdowns.

“After the inflationary period, World War II is a better comparison than the current economic situation of the 1970s and suggests that inflation could rapidly decline once supply chains are fully offline and pent-up demand levels off,” wrote The White House Council of Economic A recent white paper in Advisers.

Still, as growth slows and markets drop, the two S phrases – stagflation and sticky inflation – get 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 the progress will be very uneven,” wrote Bank of America analysts in a recent not-so-recent report. “There is a tentative evidence of an easing of supply chain challenges and we expect ‘two steps forward, one step back’ in the next year.” But this won’t be a decade-long study, they predict. Prices should begin with ease by 2023.

Is Google a great tech wreck in the green of oasis?

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

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 take those profits out.

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

“Google has a few recessions already and held up pretty well,” said Raymond James analyst Aaron Kessler. “Typically, 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 revenues increased 44% in the same period. Russia’s invasion of Ukraine, but YouTube’s scale remains unmatched, with over 2 billion monthly active users. More than a third of YouTube viewers aren’t reached by any other ad-supported streaming service.

Alphabet has a more stable business than its peers, wrote a recent note in Bank of America analysts. It also outperforms artificial intelligence and machine learning products, has significant expense flexibility and a management team that is doing more for shareholders than other companies.

About those shareholder perks: Alphabet doesn’t mind scratching its shareholders’ backs, the company has repurchased $ 52 billion in shares over the past 12 months and the board has authorized an additional $ 70 billion.

Alphabet stock will be split 20-for-1 in early July this year.

Cheaper shares mean smaller retail investors can flood into stock, further raising prices. More liquidity usually means more protection from extreme swings and split signals to investors that are thriving and in demand by shareholders.

Kessler warned that Google isn’t immune to headwinds harming other companies. “We do expect slower growth this year than we did last year,” he said.

But in the long run, Kessler said, “We think Google probably has the strongest fundamentals in big-cap internet names.”

Up next

Monday: Federal Reserve Bank of New York’s April survey of consumer expectations; 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; Energy Information Administration petroleum status report; Earnings from Disney, Warby Parker and Beyond Meat

Thursday: Weekly jobless claims; April producer price index final demand; Motorola and Tapestry from Earnings

Friday: April import and export prices; University of Michigan Consumer Sentiment

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