The market’s violent reaction to higher-than-expected inflation could result in further losses.
Investor Peter Boockvar believes Wall Street is grappling with a painful reality: Inflation isn’t abating, so the Federal Reserve won’t pivot.
“After next week’s rate hike, we will start playing a dangerous game with the economy. The next rate hike will be only the second time in 40 years that the Fed’s interest rate has surpassed the previous peak in a rate hike cycle,” Bleakley Advisory Group’s chief investment officer told CNBC’s Fast Money on Tuesday fairway.”
According to Boockvar, a 3/4 point hike at next week’s Fed meeting is practically a done deal – despite signs of softening commodity prices and softening used-car prices.
“The BL [Bureau of Labor Statistics] lags in how it captures that. So that’s why we have this kind of two-lane highway where both sides go in opposite directions,” Boockvar said. “We have accumulated 200 S&P points in the four days leading up to today [Tuesday] because the markets are one-sided, and the BLS has not yet grasped that. Unfortunately, the Fed is also lagging behind in terms of how it reacts to things. They also drive with a kind of rear-view mirror mentality.”
Major indices fell to June 2020 lows after the August CPI [CPI] rose 0.1% to 8.3% over the past year. A significant drop in gasoline prices could not offset rising costs for housing, food and medical care. According to Dow Jones, economists expected the index to fall 0.1%.
The rise in inflation prompted Nomura to officially change its rate hike forecast. She now expects the Fed to hike rates by a full notch at the next meeting.
Boockvar, a CNBC contributor, doesn’t expect the Fed to go that far. However, he warns investors against continuing to deal with the economic consequences of wealth destruction and falling profits.
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“If labor costs stay sticky if they keep rising while the revenue side starts to slow down given this slowing economy, you’re going to have more cuts in earnings estimates at the same time,” he said. “I don’t think this market just ends with one [p/e] multiple times at 17x.”
Boockvar believes multiples will eventually be 15x or less.
CNBC “Fast Money” trader Brian Kelly also sees more trouble for stocks and the economy, particularly for housing.
“We hardly see the cracks in housing construction. So when that starts to go down, people are going to feel like they have less money than before… And then we don’t know what that’s going to do to the economy,” he said. “This 75 [basis point rate hike] could even be a mistake. We know there’s a delay.”
And that might even be too much for the economy.
“This is a Federal Reserve that couldn’t raise interest rates by 25 basis points in 2018 and actually shook the market and they ended up having to step down and start this easing process,” said Tim Seymour, another Fast Money trader, added. “We started from a place where even in good times, let alone bad times, we couldn’t raise interest rates.”
The next Fed meeting is on September 20-21.