It's getting hot in here, so take off all your stocks.
OK, maybe that's not what star rapper Nelly meant when he crooned about the temperature, but it sure seems like that when we get an inflation number as overheated as we did today and investors run to the exits.
Remember how this market works. It has many masters. The first master is oil. If oil rallies, the stock market has gone higher. That's been the pattern since the bottom in the first week of February. But the second master is the Fed. Bulls don't want these masters to bump into each other. They want them separate.
Today they clashed in some important headline numbers and the victor is almost always the bear when they do.
First, let's set the stage. Yesterday was one of those bizarre up days where nothing happened of note. There were no earnings reports, nothing significant from any government anywhere around the world.
It was a terrific sign that, in the absence of any news, the market wanted to go higher.
However, the sign was a false one as we found out today when, at 8:30 a.m. ET, the bulls got some most unwelcome news, an astonishing pickup in inflation, led by higher rents, more expensive medical care and an increase in energy.
These all amounted to a 0.4% increase in the consumer price index (CPI), the highest since February 2013, more than the 0.3% we were looking for.
Now, the rent increase is part and parcel of what's gone on for months and months in this country, the inability of regular people to come up with a down payment for a home. In fact, we got housing starts today and they were right at that 1.1 million level that we've been stuck at for ages. That's not enough to drive down the price of homes and, when combined with the tight credit issue, means more and more families are renting and paying a higher price for it.
The medical? This country's been trying to get health care costs under control since the beginning of Medicare in 1965. Good luck.
But the worrisome one, at least when it comes to the daily machinations of this market, is the increase in gasoline. Talk about a market being at cross purposes. Remember, this market has two masters, oil and the Fed.
Oil fell so much, cut by two-thirds at one point, that it's long climb back to almost $50, or half of where it was, didn't even bother to show up in the broader aggregate of inflation numbers.
Until today, that is. Suddenly the rise at the pump has moved the needle to the point where the CPI can't be ignored by the Fed.
I guess you could say you have to admonish this market to be careful for what it wishes for because oil seems to be the tipping point to a discussion of the Fed having to raise rates in June to stem inflation.
I have to tell you this whole argument about inflation is positively antediluvian on so many levels.
First, the great hope for housing is that rates are so low that builders will put up more homes and lenders will loosen the reins and allow first-time homebuyers to enter the market. We are still in a situation where only the wealthiest of people have full access to credit.
Second, if only the Fed could control the price of health care. But higher rates mean nothing to the vast government-health care complex that has failed miserably to control costs.
Third, and most revealing, higher rates would be disastrous for the oil producers that are trying their best to pump out what they can to meet banker demands. You get rates up, you sink marginal producers who can bring out oil at these prices, and you end up accelerating energy inflation, not crimping it.
In other words, higher rates won't stop inflation, if anything they could set off a bout of it!
You know the true oddity of this whole debate, the most ironic part of the intersection between the stock market and the Fed? The portion of the stock market being hurt the worst right now is the portion that the consumer interacts with: retail. The S&P 500's new-low list isn't just dominated by retail and apparel stocks, they are the only ones on it!
Why is this so significant and ironic? Because the chief reason why these stocks are on the new-low list is that they have had to cut price so far on merchandise that they can't make anywhere near what they thought they could. The disinflation at the retail level, accelerated by none other than Amazon (AMZN), is crushing the retailers. But somehow this most important -- and positive -- part of the consumer price story isn't even reflected in the aggregate numbers. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Sadly for the bulls, we are in the exact opposite mode we were in yesterday. The talk of higher rates from the Fed because of higher inflation has often led to dramatic declines in the consumer packaged-goods stocks. That's because they are beneficiaries of lower inflation and low interest rates because of their mostly bountiful yields.
If the Fed raises rates, those yields become less competitive. And if commodity inflation is coming back, these companies won't make as much money as we thought they would. I could tick down all the stocks that are being hurt today by this phenomenon. However, I think it would be simpler to just focus on the epitome, Clorox (CLX).
Here's a company with a long history of doing what's right for shareholders with a management that's insanely focused on building value both short and long term. It just reported sharply better-than-expected earnings. And just last night it increased its dividend from 77 cents to 80 cents a share.
What's not to like?
Well, for one, this company's stock now sells at 25x earnings even as the company grows at about a 6% rate. Second, despite the dividend boost, the company's stock only yields 2.5%. Third, if inflation's really roaring back, then the raw goods that make up their products would go higher, squeezing their margins.
In other words, Clorox may go from the stock to own in a low-inflation, low-interest-rate world to being the stock to hate in a high-inflation, high-interest-rate world.
Now all of this kind of thinking seems pretty darned granular, as we call it in the business, meaning we are breaking it down to a level that seems pretty darned silly. One hot inflation number does not change the entire outlook for the market. But it does reintroduce the notion of two rate hikes this year instead of one or even none, and this market's investors had been lulled into thinking that one, at most, was all we should worry about.
That, plus the fact that Home Depot (HD), the third-largest retailer and a Dow stock, reported an unbelievably great number this morning but somehow got tabbed with a "slowing growth" story and that kyboshed the stock but good. In fact, it was up a buck at one time but is now actually down almost four bucks. What a swing. Now, is it really slowing? No. Does that matter? Have I taught you nothing? The market makes up its mind on a dime and then changes it on a dime. Give this stock a few days' time and it will be back where it started and then some.
So, we have to accept the fact that the two masters have now collided, oil's gotten too high and is reintroducing a new narrative, one where the Fed might be back in play several times this year. If that's the case, there's more downside ahead even as I think one could add, convincingly, that any inflation we have wouldn't be responsive to the Fed's entreaties and higher rates. If anything, it would only accelerate both whatever nascent inflation there might be, as it most effectively depreciates a prized asset of all who are reading: your portfolio.