Consumer stocks are starting to believe the Fed is serious

The Federal Reserve is battling the worst US inflation in 40 years, and its assault on rising consumer prices is likely to get messy. You can’t just rein in consumer price increases the 1970s way without reining in the whole economy. So far, the stock market has mostly ignored this risk, but subtle signs are emerging that the market has begun to understand the challenges.

As of Wednesday morning, the S&P 500 was down just 5.1% for the year despite 7.9% year-on-year inflation, a raging war in Ukraine and an outbreak of coronavirus. Covid-19 in China which led to lockdowns. But the release of new details of the Fed’s deliberations at its meeting last month showed that “many” officials appeared open to aggressive 50 basis point interest rate hikes in the months ahead.

Minutes from the March 15-16 Fed meeting also showed a few participants worried that “high inflation and inflation expectations could become entrenched if the public began to question the Committee’s resolve.” to achieve its long-term inflation target of 2%. In other words, they want to let people know they’re ready to be tough.

This awareness is beginning to be felt in consumer actions. On Wednesday, consumer discretionary stocks fell 2.6% while consumer staples jumped 1.4%, one of the five biggest daily outperformers for commodities over the past 20 years. . The slump came as inflation saps consumer sentiment, White House medical adviser Anthony Fauci warned of a further Covid surge in the US and rising interest rates threaten the economy. appetite for expensive products.

The single largest outperformances occurred at the start of the pandemic, during the Great Recession and in the later stages of the dot-com meltdown. Overall, S&P 500 Consumer Discretionary stocks are now down 11.5% for the year, compared to a 0.7% gain for Consumer Staples, indicating that some investors are actually listening. fed.

Going forward, it is also important to consider the fate of megacap tech stars. As megacap tech goes, so does the market — and rightly so because it’s about a quarter of the S&P 500 by market weight. Apple Inc., Microsoft Corp., Amazon.com Inc., Tesla Inc., Alphabet Inc. and Nvidia Corp. all took significant hits on Wednesday, with Nvida slumping the most since March 7.

As my Bloomberg Opinion colleague and former New York Fed Chairman Bill Dudley wrote on Wednesday, the Fed conveys policy through financial conditions, including the stock market. “The price of stocks influences the degree of wealth” of people. They play an important role in influencing the consumer economy and ultimately inflation. If equities remain resilient, the Fed will likely end up raising interest rates even more aggressively.

But at least now there are signs that the market is beginning to understand this and may not be the stumbling block tripping up the Fed.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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