Pro Perspectives 5/6/20

May 6, 2020

Last week stocks were approaching two big areas of technical resistance on the charts. And we talked about the prospects that the top of a range would be marked there, for a while, until we are able to get some visibility on what the world looks like with economies reopening.

That seems to be playing out.

Now we have areas of the country slowly reopening. And we have two things to watch closely: 1) any rise in hospitalization rates, and 2) the effects of a sharp bounceback in demand. These two wouldn’t be mutual exclusive in the near term. But the latter of which, may expose, very quickly, the supply chain disruption.

In this case, unlike the aftermath of the global financial crisis, it’s easy to turn demand back on (removing stay-at-home orders), but it’s not as easy to turn production back on (re-staffing, manufacturing, inventory building/ new order fulfillment). This will create a lag between demand, and when supply can satisfy that demand. That tends to be a formula for higher prices.

We’re already beginning to see it in food prices. Just wait until the pent-up demand for a host of other products and services hits the economy.

Let’s take a look at what the early 70’s supply shock in America did to prices.

This shows the dramatic move in inflation from a “shock event.” In the early 70s, OPEC blocked oil exports to the U.S., sending oil prices up four fold in 1973. Broader prices in the U.S. economy followed. You can see in the chart above consumer price inflation (excluding food and energy) spiked from under 3% to nearly 12% in two years.