Pain at the Pump

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DJIA: -2.37% to 32,817.38
S&P 500: -2.95% to 4,201.09
Nasdaq: -3.62% to 12,830.96

Pain at the Pump

 Pain at the Pump. Fossil-fuel prices continue to soar, and investors are concerned about how that will be felt in consumers’ wallets amid already sky-high inflation readings. The U.S. is considering cutting off oil imports from Russia in retaliation for its war with Ukraine.

Price relief won’t be here any time soon, and the Federal Reserve could fall even further behind the curve. The worst-case scenario is the central bank needing to increase interest rates faster to combat accelerating inflation despite a faltering economy.

The Nasdaq Composite dropped 3.6% today to fall into a bear market. The S&P 500 lost 3% and the Dow Jones Industrial Average slid 2.4%.

There was even more action in commodities markets today. The U.S. price of oil traded as high as $130.50 a barrel, before finishing the day below $120. That’s still up almost 60% year to date, and the highest for West Texas Intermediate crude since 2008.

Wheat futures traded in Chicago settled at $12.94 a bushel today—up 68% this year to a record high, according to Dow Jones Market Data. Prices of several metals produced in Russia have soared as well.

Even before the current run-up in commodity prices, Morgan Stanley strategist Mike Wilson was already bearish on consumer spending in 2022. That makes up some two-thirds of U.S. gross domestic product.

“Fading stimulus tailwinds, high prices across consumer spending categories, and negative real wage growth have all driven this trend,” Wilson wrote. “Now, an energy squeeze is being introduced on top of those factors—a dynamic which will hurt the low-end consumer, who spends more on goods than services, disproportionately.”

As for the impact of the Russia-Ukraine war on corporate profits, there’s no direct link. The S&P 500 generates less than 1% of its annual revenues from Russia. The most exposed company in the index is cigarette-maker Phillip Morris International, which had 11% of sales from Russia last year, according to data from FactSet. It’s brilliant, we are addicting the Russians to American cigarettes and they are buying into it. Hell, they have already bought into it.

Wall Street analysts continue to forecast record profits for this year.

“One important factor that has differentiated the U.S. to it peers is that earnings have held up much better and the profit outlook has remained positive,” wrote Jefferies strategist Sean Darby. “2022 earnings growth was revised up after Fourth Quarter 2021 earnings season. The U.S. nominal GDP boom from Second Half 2020 to Fourth Quarter 2021 has been one of the strongest since the 1950s.”

It’s the soaring energy costs that could be felt most severely—through increased raw materials, manufacturing, and transportation costs or lower consumer spending. That’s a potential problem for companies with sales anywhere, not just in Ukraine or Russia. Consumer discretionary stocks in the S&P 500 dropped 4.9% today, while energy shares added 1.5%.

A broad downturn in profits and the dreaded “R-word” about the economy aren’t part of the everyday conversation on Wall Street right now. But there are more questions these days, and the outlook is certainly some degree of worse than at the start of the year.

“Prior to Putin’s war, the consensus outlook for the economy was that while the Omicron wave depressed economic activity during January, economic growth was likely to rebound as the pandemic abated,” wrote Edward Yardeni, president of Yardeni Research. “Now we see a more stagflationary outlook with persistently higher inflation and less economic growth. A recession no longer can be ruled out given the latest jump in oil prices.”

Yardeni dropped his year-end S&P 500 forecast to 4000 today, from 4800 previously. The new target implies a roughly 15% drop for 2022.

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