4-19-22: Inflation Rates Will Normalize – And So Will Growth Stock Increases

by Jason Bodner

April 19, 2022

Inflation is scorching wallets and stomachs everywhere. Fears that inflation will run amok and spiral into hyperinflation are real. Whether these fears are warranted is up for debate, but we all fear higher prices.

Gas is up 65% or more in some parts of the country. Fertilizing crops is more expensive, so it costs more to eat. Grains are up largely due to the Ukraine invasion. Eggs and chicken are skyrocketing due to some nasty Avian flu spreading to 27 states. Per an April 16 Washington Post article: “According to the USDA, the price of a dozen eggs in November hovered around $1. Right now, that price is $2.95 and rising.”

Where I live, a dozen eggs cost $1.79, so take that news with a pinch of skepticism, but eggs are up.

Despite all these scary headlines, it’s important to contextualize our inflation. This is nothing compared to the 1850s California Gold Rush, when a dozen eggs cost $90 in today’s money. Worse yet, a pick-axe cost the equivalent of $1,500, and a hotel room back then was near $300,000 a month in today’s cash.

The price of gold back then was fixed at $20.67 per ounce, or $762 in today’s money. With gold at $1,975 on Sunday, gold is up 159% in real terms (or 9,455% in nominal terms) in 172 years, but that’s a long wait. Imagine though, renting a room for $300k a month to house miners coveting a $760/oz. metal.

Folks, we’re not suffering real inflation yet, but anxiety levels might lead us to believe otherwise. Add to that the level of discontent with recent stock market returns, and we’ve seen a disappointing 2022 already.

Now is a good time to check in and see what’s really going on with stocks. The fact is that only certain stocks are getting punished while others flourish. Such has been the trend since last November, when tech stocks started burning, so let’s do a top-to-bottom dive through the market to see what’s really going on.

The Big Money Index Has Been Rising Since Late February 2022

The Big Money Index (BMI) measures unusual institutional money flows in and out of the broader stock market. Despite a dismal 2022 market performance thus far, the BMI has been rising since late February:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

How can that be? Many of our portfolios are down, so what I just said seems counterintuitive.

The first thing to understand is that the BMI is a moving average of unusual stock buys and sells over a 25-day moving average. Over 30 years of my data, we average roughly 66 buys and 34 sells per day. That means that the market generally goes up twice as much as it goes down. This is a long term up-trending stock market, so the answer lies in what we don’t see: Selling has moved from extreme to normal levels:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With selling pressure lessening, the BMI lifts. The real story, of course, lies under the surface. Let’s look at all 11 sectors in terms of unusual buying and selling over the last six months, paying special attention to the last month. The emerging picture is that a big repositioning has happened, and new trends are afoot.

First, let’s see where the selling is strong. November hit many stocks hard. But selling intensified in tech, discretionary, communications, and industrials. Since mid-March, selling in those sectors has evaporated:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Selling gave way to recent buying in Health Care stocks:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Next, let’s look at where the strength has been emerging. They say the best offense is a great defense. Defensive sectors have been the new love affair. Energy has seen immense buying pressure, only recently slowing. Utilities selling dried up, coupled with fresh buying. Staples selling dried up with new buying. And Real Estate’s massive inflow that I highlighted two weeks ago seems to be following through:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The undecided sectors, Financials and Materials, can’t seem to make up their mind, so their role is to further help keep the illusion of an undecided, volatile market.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

From this survey, it’s easy to see that the “general” stock market doesn’t tell the whole story. Growth-heavy sectors were hurt, while defensive sectors were elevated. That divergence, added by aimless financials and materials, delivered a nauseatingly volatile market with clear winners and losers.

The one important theme since March, though, is that selling suddenly stopped in the weak areas. And that vacuum of selling gave way to fresh (albeit sometimes small) buying in growth: tech, discretionary, communications, industrials, and Health Care. Add that to buying in energy, utilities, staples, and real estate and we may have an uptrend in the making. The rotational violence of the market in past months may return, but for the moment, this most recent action looks very constructive to my eye.

Turning to stock size, we see encouraging buying in small- and mid-caps – a notable pain area for many months. That’s encouraging because 91% of all buying last week was in companies under $50 billion cap:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week saw 30% of buying in Health Care. Add in tech and 40% of buys came from those two sectors.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Compare Health and Tech buying from last week to all 15 weeks since the beginning of 2022, and you see it growing. Also, energy buying is slowing. You also see tech and health care selling slowing.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Let’s say all this constructive buying is “only short covering.” That, too, is positive because if traders feel the downside is exhausted and they must cover their short bets, then the trend is more likely to be one of two options, either trendless, or up. Given the sector strength, the optimist in me is leaning towards “up.”

Inflation is real, but it’s far from the worst levels we’ve seen in U.S. or world history. Meanwhile, stock buying is focused on companies best poised to benefit from inflation. Regardless of sector, companies that grow sales and earnings – those that can increase their prices with inflation – are poised to do well.

In the end, all markets need to correct – stocks and sectors, but also consumer prices and interest rates.

Alas, no one wants to endure the process: “Everyone wants to go to heaven but no one wants to die.”

Important Disclosures:

Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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