Dealing With Kryptonite Isn’t Easy

American markets today, Wednesday, viewed several hours before the 9:30 a.m. Eastern time opening look poised for a negative start as the S&P 500, DOW and NASDAQ are firmly in the red with very little chance of climbing out during the trading day.

Canadian markets also look set for a negative start with the TSX 60 firmly in the red.

European markets are open at time of writing and the story is similar: the FTSE 100, DAC and CAC 40 are in the red, again with no chance of climbing out during the trading day.

Amongst precious metals, gold is firmly in the red but silver is edging back and forth between being flat and in the red.

Amongst currencies, the Euro and Canadian dollar are down against the American greenback while the British pound sterling is up. However, while they’re in the red, both the Euro and Canadian dollar are close to flat and could edge up.

These negatives follow yesterday’s drop, driven in large part by data from the United States Bureau of Statistics showing what confronts us every time we go shopping: that consumer prices surged 71/2 % last month compared to a year ago. Compounding that news, St. Louis Federal Reserve President James Bullard announced that the data made him more ‘hawkish’ and advocated an increase of a full percentage point by July 01.

That did not help market stability yesterday and the Nasdaq dropped approximately 2% after Bullard’s remarks.

One analyst borrowed an image from the Superman legends to explain what we can expect. “Inflation tends to be kryptonite to valuations,” ventured Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis.

“Higher inflation causes multiples to compress and that’s what we are experiencing right now,” he said in a Reuters report.

These results prove something about volatility and the markets that we have known but analysis always sounds more accurate when a world-renowned expert gives voice to what we are thinking and that happened again on Wednesday.

Investing legend Bill Miller said that more volatility is coming for stocks. In a CNBC interview he also said that Facebook parent Meta Platforms is now undervalued, and that the much beaten-up Peloton is on his radar.

I can accept that Meta Platforms is now a value stock instead of a growth stock but at this moment –and with all due respect -- it does not appear undervalued. If the picture changes while the stock price stays at current levels, perhaps an argument can be made for saying that it is undervalued at that time. To regain its former status in investors’ lists of favorites, it would need to increase advertising and therefore earnings and that would mean continuing head-to-head competition for advertising dollars with TikTok. Its implied claim to primacy in the metaverse is distant and it needs to – first – chart a plan to growth and -- second -- convince the market that it has such a plan.

A Morningstar report crystallizes what has occurred and cuts through the confusion:

The most expensive corners of the markets were those that took the hardest punches before a bounce on Tuesday. While the Morningstar U.S. Market Index lost 2.4% in the first 10 days of the year, the Morningstar U.S. Technology Index lost 5.3% to start, and all categories of fast-growing stocks lost north of 7%. Meanwhile, value stocks and sectors such as energy and financials rallied strongly.

Morningstar re-iterates currently popular thinking by maintaining that ‘it all ties back to the relationship between the markets, the Fed and the economy.’

It maintains that the recent jolt came due to what it calls ‘accelerated expectations around the Federal Reserve’s response to surging inflation and a tight labor market’ and recalls that the Fed was not expected to raise rates until May or June and then only twice this year, hence the surprise at its change of plans.

The easy money policies from the Fed, coupled with money flooding the economy from fiscal stimulus programs out of Washington, had been a key force in the stock market’s 2021 rally, says Jurrien Timmer, director of global macro at Fidelity Investment. “Now that liquidity tide is going back out to sea,” he says in the same Morningstar report. 

That equation leads to what we can expect for the rest of the year. “We’re in a period where the market doesn’t go up in a straight line,” the way it was for much of 2021, Timmer says. Instead, “It will be more often interrupted by the kind of tantrum we’ve been seeing." Tantrums mean volatility.

This leads to several conclusions. In a market where Meta Platforms can shift from being a very much in favor growth stock to a value stock after a dramatic sell-off, we should expect the unexpected. Volatility is with us for at lest the short and medium terms.

And as happens regularly, I’m reminded of the words of the Ryan Gosling character in Blade Runner 2049: ‘Buckle Up’.

Related: Investors: Be Careful in Europe and Watch for Disney

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.