Momentum is very negative for the market right now. Even Apple (NASDAQ:AAPL) stock is off a little bit today. For the last few weeks, Apple has pulled the S&P 500 and the Nasdaq to new highs. But under the surface of this market, we’re watching thousands of stocks experience breakdowns this week. Small-cap stocks were off more than 3% heading into Friday over the last week, while nano-cap stocks fell 5%. It’s not surprising to see a rotation out of some stocks based on concerns about inflation.
I like to step back and think about what Warren Buffett had to say about inflation back in the late 1970s and early 1980s when inflation was high. Buffett argued that profits and earnings no longer mattered. Instead, what mattered was a company’s ability to improve or manage its purchasing power. Remember, profits are put into the pockets of investors.
But they’re also cycled into research and development. They’re also used to purchase materials to make products. A company must successfully pass on these increased costs to their customers. Otherwise, they will face marginal pressures due to the impact of inflation on their balance sheet.
Pay close attention to guidance figures this month as executives talk more openly about the impact of inflation.
Is Jerome Powell Under Pressure?
This week, Fed Chair Jerome Powell spoke before Congress for two days about the state of the U.S. economy. Every six months, the Fed Chair goes before Congress to update the House and the Senate.
Powell didn’t say anything new. It was a pretty unimpressive event. But we do know that the central banks expect inflation to run hot through the end of the year. Powell has said that inflation will cool off by 2022. But most economists aren’t so convinced.
I’m expecting that inflation will average north of 2% through 2023. I’m not alone here. The simple fact is that many companies locked in contracts when commodity prices started to rise, and the continued pressure in the PPI is an indicator of shock through the U.S. supply chain. Companies will not let their costs increase and their profits dip. We’ll see rising prices.
Janet Yellen’s Fed Chair Endorsement
The thing that stood out the most for me this week was not Powell’s statement. It was that of Janet Yellen, the Treasury Secretary. Reporters asked Yellen if she endorsed Jerome Powell as Fed Chair for a second term. She didn’t answer. She said that such a statement was reserved for conversation with President Joe Biden.
I look at Jerome Powell under pressure, and I think this guy can’t wait to get back to the private sector. Most economists believe that Powell will receive the nomination. A Reuters report from Friday made a very good case that Powell will get the nod.
But let’s be honest for a minute. Powell was a Trump appointee, and he is not a professional economist by traditional standards. He doesn’t have the word Doctor in front of his name. His term ends in 2022. Two other Trump appointees will see their terms end as well.
My bet is that Biden moves to reshape the Federal Reserve. There is too much temptation to incorporate progressive policy around the central bank. Whether it’s climate change, Keynesian spending on housing or other public programs, the Fed can act as a mechanism to push more centralized planning.
If I’m a betting man, and I am, my money is on current Fed Governor Lael Brainard. She’s a Democrat. She’s opposed Trump-era policy on banking regulations. And she’s a holdover from the Obama years. Her academic work is heavy on climate change and global poverty.
I’m expecting the Fed to put a heavy focus on both issues in the future, even if the bigger issues are inflation, jobs, and other priorities in front of our eyes. This is how Washington works. All we can do is try to adapt and make money.