The Price of Oil
Last week, the University of Michigan produced their consumer sentiment, which hit a crisis low. You can see in the chart shown in the video for this episode, where the consumer sentiment is lower than it was at peak of the covid recession. Where is that going to turn what does do to markets and consumer spending? You can see on the chart where the purchase of goods seems to have leveled off but it’s not coming down. So, what drove the consumer sentiment to be so negative? It’s not spending, and it appears to be inflation. Is there any hope looking at the future that inflation may come down? One of the drivers of inflation is energy prices. People fill up their gas tanks often and when they see higher prices, that impacts consumer sentiment directly. An area where we may see relief is in gas prices. Part of the infrastructure bill that President Biden will be passing has a funding mechanism of selling some of the U.S. strategic petroleum reserves. The U.S. has millions of barrels for emergency use and part of the funding mechanism was to sell some of those barrels. During the crisis when prices were dropping, we had to reverse action. The Trump administration purchased oil of around 77 million barrels and added it to the petroleum reserve. The Biden administration has turned around to sell those. We went from $20 a barrel up to $80. That’s one of the most profitable trades we’ve ever seen. The U.S. government turned around and made over $4 billion which is a huge funding source that also can help consumers just in time for the holidays, as we sell the oil and bring prices down. We could see that sentiment hopefully bottoming just in time for everyone to get together at the Thanksgiving table.
Corporate Earnings and Inflation
The hot topic in recent weeks has been inflation but the question is, what do we look at specifically where inflation could hurt the market? One area we look at is inflation’s impact on corporate earnings. As you can see in the chart shown in the video for this episode, we’ve seen a clear turn lower in operating margins recently. In fact, we have been watching operating margins for some time, and the fact that we have now seen two weeks where they have moved lower at the very least deserves some attention. It’s also important to point out in the chart that margins are still very strong, but the market has been concerned about rising costs and it finally appears to be reflecting. We will be watching very closely to see what direction corporate operating margins go next.
The Fed and Interest Rates
We keep hearing the word transitory, but what does that mean? It means temporary, but that could mean a lot of things. Is it temporary for a year, three years, or longer? Last week we got the Consumer Price Index report, and it was up nearly a full percent for the month and 6.2% from a year ago. However, when excluding food and energy, which is common practice due to their volatility, it’s only a 4.6% increase. The Fed has typically shown that they pay attention to the Personal Consumption Expenditure Index and that’s been showing up 3.6% for the last three months, holding steady. On the chart shown in the video for this episode, you can see that we are still struggling to get to a 2% average for the last 10 years. Even with the 6.2% right now, we’re barely there. It’s hard to tell if we are making up for lost time, or if the Fed is going to start tapering and ramping up rates at a faster pace and that’s what the market is trying to figure out here in this case.
This morning, the Portfolio Team talked about the momentum we’ve seen in the overall markets for the month of November. Last week, we had two days that we saw a pullback. We had some rumblings of a possible pushback in the markets, but on Friday, the S&P 500 closed at a price of 4,682. That gives us a resistance level of 4,715 and a new support level of 4,655. We’re also seeing the 50-day moving average start to creep up to the 4500 marks, currently sitting at a price of 4,492. It’s also important to keep in mind that, not only are we looking at the overall markets, but we’re looking at the individual sectors and industries within these markets to see the trends and the momentum that we can hopefully carry through the rest of the year.
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