A Mixed Bag For Inflation

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In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:

A Mixed Bag Of News On The Inflation Front

On the inflation front, we have a mixed bag of news early this week. A surprise announcement from OPEC+ to reduce output by one million barrels per day led to a jump in prices. Oil prices were leaking through mid-March with growing recession risk on the horizon in light of the recent banking crisis, so this price bump certainly isn’t great news for either the Fed or consumers’ wallets.

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Market analysts generally note that supply and demand for oil are currently locked in a delicate balance at this point given the market disruptions dating back to Russia’s invasion of Ukraine. This fresh round of production cuts, in combination with last October’s cuts, represent about 3% of the global oil supply evaporating in a fairly short period of time. 

With that in mind, higher energy prices may throw a wrench into the recent disinflation we’ve seen and could partially offset a reduction in shelter inflation that’s expected to show up soon given the lagged impact of how it’s calculated in inflation readings.

On the other hand, weakness in the labor market may finally be starting to take hold. Job openings from the Labor Department’s JOLTS report dropped to under 10 million for the first time since May 2021, bringing the ratio of vacancies to those seeking work to under 1.7 to 1. To be sure, the labor market is still quite strong, but this is a movement in the right direction that we’re confident Chairman Powell is happy to see.

Technology Stocks Experience A Strong Run

Technology stocks, and growth stocks more broadly, have also experienced a strong run this year, with the tech-heavy Nasdaq Composite Index up almost 17% through yesterday’s close. Value stocks trumped growth stocks by a wide margin around the globe last year, though that trend has sharply reversed through the early innings of 2023, particularly in the US.

Mega-cap technology stocks have come to serve as something of a new safe haven during flights to quality, and March’s market distress certainly provided an opportunity in that regard.

Mega-cap tech stocks also likely benefited from March’s steep drop in yields as growth stocks, generally speaking, tend to be longer-duration assets than value stocks. 

The relationship between value/growth stocks and interest rates is complex and time-varying. With that said, over the last few years in particular, correlations have become more pronounced and declines in yields have been a strong buoy for growth stocks.

About Prudent Management Associates

Prudent’s core investment philosophy focuses on minimizing risk over time.  As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.