Consumer stocks now believe Fed is serious

The Federal Reserve is fighting the worst US inflation in 40 years, and its assault on rising consumer prices is probably going to get messy. You can’t just rein in 1970s-style consumer price increases without slamming the brakes on the entire economy. Until now, the stock market has mostly ignored this risk, but subtle signs are emerging that the market has begun to comprehend the challenges.
The S&P 500 Index was down just 5.1% for the year despite 7.9% year-over-year inflation, a raging war in Ukraine and a Covid-19 outbreak in China that has led to lockdowns. But the release of new details from the Fed’s deliberations at its meeting last month showed “many” officials appeared open to aggressive 50-basis-point interest-rate increases in the coming months.
The minutes of the Fed’s March 15-16 meeting also showed that a few participants were concerned that “elevated inflation and inflation expectations could become entrenched if the public began to question the Committee’s resolve” to reach their stated 2% longer-run inflation goal. In other words, they want to let people know that they’re willing to get tough.
That realisation is starting to play out in consumer stocks. Consumer discretionary stocks fell 2.6% while consumer staples jumped 1.4%, one of the five biggest single-day outperformances for staples in the past
20 years.
The slump came as inflation saps consumer sentiment, White House medical adviser Anthony Fauci warned of another Covid uptick in the US and higher interest rates threaten the appetite for expensive products.
The only larger outperformances were at the outset of the pandemic, during the Great Recession and in the late stages of the dot-com bust. Overall, S&P 500 consumer discretionary stocks are now down 11.5% for the year compared with a 0.7% advance for consumer staples, which indicates some investors are actually listening to the Fed.
Going forward, it’s also important to consider the fate of the megacap technology stars. As goes megacap tech, so too goes the market — and rightfully so because it accounts for 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 sizable hits Wednesday, with Nvida slumping the most since March 7.
As Bloomberg Opinion writer and former New York Fed President Bill Dudley wrote, the Fed transmits policy through financial conditions, including the stock market. “Equity prices influence how wealthy” people feel. They have an important role in influencing the consumer economy and, ultimately, inflation. If stocks remain resilient, the Fed will probably end up raising interest rates even more aggressively.
But at least now there are some signs that the market is starting to get that and perhaps won’t be the stumbling block that trips up the Fed.

—Bloomberg