The Morning Dispatch: Inflation is Tanking the Stock Market

Happy Thursday! We cannot stop watching this video of Denver Nuggets superstar Nikola Jokic being surprised with his second consecutive NBA MVP award while tending to a stable of horses in his hometown of Sombor, Serbia. 

Quick Hits: Today’s Top Stories

• Following up on last week’s scoop, Politico reported Wednesday that Supreme Court Justice Samuel Alito’s February draft majority opinion overturning Roe v. Wade remains the only draft circulated in the Dobbs v. Jackson case, and that no conservative justice who initially sided with Alito has switched his or her vote thus far.

• In a largely symbolic vote on Wednesday, Senate Democrats failed to advance legislation that would have established a federal right to abortion nationwide with next to no restrictions. The measure came 11 votes shy of the 60 required to pass, as all Republicans and one Democrat voted against it. “[Democrats are] trying to make people believe that this is the same thing as codifying Roe v. Wade,” Democratic Sen. Joe Manchin said, explaining his opposition. “This is not the same. It expands abortion.”

• In light of recent protests surrounding the leaked draft opinion, Justice Department spokesman Anthony Coley announced Wednesday Attorney General Merrick Garland has directed the U.S. Marshals Service to “help ensure the justices’ safety” by providing additional support to the marshal of the Supreme Court and Supreme Court police. The Senate unanimously advanced legislation on Monday that would extend security protections to justices’ immediate family members, but it has yet to pass the House.

• Prime Minister Boris Johnson announced Wednesday the UK had agreed to mutual defense pacts with Finland and Sweden ahead of their likely accession into NATO. “These are not a short-term stop gap,” Johnson said, “but a long-term commitment to bolster military ties and global stability, and fortify Europe’s defenses for generations to come.”

• The Centers for Disease Control reported Wednesday that nearly 108,000 people died of drug overdoses in the United States last year, the highest figure on record and a 15 percent increase over the approximately 94,000 overdoses reported in 2020.

• Hong Kong police arrested several pro-democracy activists and leaders on Wednesday for violating the region’s national security law, charging them with colluding with foreign powers over their involvement in a now-defunct bail fund that supported political protesters in Hong Kong. Among those arrested was 90-year-old Cardinal Joseph Zen, who has been critical of the Chinese Communist Party’s restrictions on religious practice. The Vatican expressed “concern” with Zen’s arrest, while the Biden administration called on the People’s Republic of China to “immediately release” those detained. Zen and others were reportedly set free on bail later in the day but could face life in prison if convicted.

• Veteran Al Jazeera reporter Shireen Abu Akleh was shot and killed while covering an Israeli counterterrorism raid in the West Bank on Wednesday. Al Jazeera and other reporters on the scene said Israeli forces were responsible for her death, while Israeli Defense Minister Benny Gantz said it was too soon to make a determination. The Biden administration is urging Israel and the Palestinian Authority to conduct a full and transparent investigation; Abu Akleh was a U.S. citizen.

• Kentucky Attorney General Daniel Cameron—Senate Minority Leader Mitch McConnell’s former general counsel—announced Wednesday he is running for governor in 2023, becoming the third major Republican candidate to enter the race to unseat Democratic Gov. Andy Beshear.

• The Senate voted unanimously on Wednesday to confirm Adm. Linda Fagan as the next Coast Guard commandant, making her the first woman to become the highest ranking officer of a U.S. military branch.

• The Senate voted 51-50 on Wednesday to confirm Alvaro Bedoya—founder of Georgetown Law’s Center on Privacy and Technology—as a commissioner on the Federal Trade Commission. Vice President Kamala Harris broke the tie, and Bedoya’s confirmation will give the FTC a Democratic majority, freeing up Lina Khan, the agency’s chair, to pursue a more aggressive regulatory agenda.

A Rough Patch for Investors

The good news: The annual rate of inflation may have peaked in March, as we cautiously predicted in a Morning Dispatch (🔒) last month. The bad news: It’s going to be a looooong and bumpy ride back down to price stability. You’d technically rather drop an 8.3-pound dumbbell on your foot than an 8.5-pound one, but your toes are going to hurt either way.

That impeccable metaphor was brought to you by the Bureau of Labor Statistics, which reported on Wednesday the consumer price index rose 8.3 percent year-over-year in April, a slight decrease from March’s 8.5 percent and the first drop in the annual number since August’s headfake. The 0.3-percent CPI increase from March to April was the measure’s slowest pace since January 2021, and several staples—gas, clothing, smartphones, used cars, ham—actually got cheaper over that timeframe. 

But even that glimmer of optimism comes with a boatload of caveats. Gas prices have crept back up since BLS researchers last conducted their monthly survey—regular gas hit a record-high $4.40 per gallon on Wednesday, according to AAA—and the average grocery store trip now costs nearly 11 percent more than it did a year ago. If you strip out these two more volatile categories—energy and food—the resulting “core” month-over-month inflation registers at 0.6 percent in April, double both April’s topline figure and March’s core data. And the phenomenon we outlined a few months ago—inflation filtering through the economy from goods into services—continued apace, with core commodities holding steady month-over-month while core services jumped 0.7 percent.

“Services,” in this instance, refers to things like housing, health care, insurance, education, recreation, and public transportation. And in April, a significant portion of the category’s spike can be attributed to what analysts hope will be a one-time, 18.6-percent jump in airline fares. But taken all together, yesterday’s CPI data shows we’re still very much in the thick of this thing. “There was a lot of indication within this report that we probably actually have seen the peak in inflation, but that inflation rates are going to stay high,” said Brendan Walsh, co-founder of Markets Policy Partners. “They’re not going to come off as quickly as we hoped maybe a month ago.”

Investors took note, with the Dow Jones Industrial Average falling more than 1 percent over the course of the day and the S&P 500 down 1.65 percent. The tech-heavy Nasdaq Composite performed even worse, shedding 3.18 percent of its value. Why? The underlying inflation itself is concerning for equities of course, but even more ominous is what that inflation portends. “Part of [the market dip] is inflation. Obviously higher input costs, decreased margins. But that was already very much priced in,” Walsh told The Dispatch. “What’s now the fear is that the Fed’s going to overdo it and drive us into a recession. That’s what is starting to get priced in now too.”

The Federal Reserve hiked interest rates a full 50 basis points (half a percentage point) last week for the first time in more than 20 years, and Wednesday’s inflation data all but ensures it’ll do the same at each of its next two meetings, scheduled for mid June and late July. As of yesterday, investors now expect the central bank’s target federal funds range to more than triple by the end of the year—from the current 0.75-1.00 percent to 2.75-3.00 percent. That’ll raise the cost of borrowing, tamping down aggregate demand and cooling economic activity.

“The worry is, if they slow the economy to try and tame inflation, will they kill economic growth? They have about 90 percent of the time that the Fed has gotten involved and started raising rates,” said Michael Farr, CEO of investment firm Farr, Miller & Washington. “Until the Fed says that they’re done, I think you have to expect continued volatility [in the market]. Stocks are trying to reprice for the new level of interest rates for the new normal—and we don’t know what that is yet.”

“Reprice” is one way to put it; “go down the toilet” is another. The Dow Jones Industrial Average (-11.3 percent since the beginning of the year) and S&P 500 (-17.54 percent) are nearing bear market territory—generally defined as plunging 20 percent from a recent peak—and the Nasdaq (-25.9 percent) is already there. In the not-too-distant past, the Fed may have watched with horror as the market collapsed after one of its meetings—the aforementioned indices have fallen 5, 7, and 10 percent over the past week alone—and decided to change course. But don’t hold your breath waiting for a dovish pivot to rescue your 401(k). As Josh Barro noted in his latest Very Serious newsletter, equities falling is essentially a prerequisite for taming inflation.

A cooling of stock prices should also hopefully help cool off inflation: The negative “wealth effect” from lower brokerage account balances should discourage some consumption (and some bidding wars over houses), and the higher cost of capital for corporations that want to issue new equity should be a moderating force on corporate investment. Basically, we’re seeing what’s supposed to happen when the Fed does what it’s been doing lately.

That may be so, but it’s cold comfort to Americans looking at their retirement portfolios in one browser window and reading headlines referencing the “Dot-Com Bubble” in another. With that downturn, it took the Nasdaq nearly 15 years to rebound to its pre-crash levels. Do investors nearing retirement age have time to wait for the market to bounce back? Or should they cash out now before things get even worse?

Walsh sees some parallels between the Dot-Com Bubble and the recent cryptocurrency/meme stock/SPAC crazes, but believes the overall market is in a fundamentally different place. “Companies that are in the Nasdaq, they’re not crap companies,” he said, pointing to Zoom as an example of a “perfectly fine” business that is just coming down from a “crazy valuation” because of the pandemic. “We threw money at the world and told people not to go out for two years, so they day traded and bought crypto. We’re seeing stocks went up too much last year—and probably the year before, too. Now they’re correcting in the face of higher rates.”

That correction will eventually be complete, but timing its end perfectly will be difficult for even the most experienced investors. “I used to have an older friend who, when the markets would get dicey, had a sign on his desk that said, ‘If you feel confident in calling a bottom, don’t,’” Farr said with a laugh. “This can certainly go lower. This is going to be a longer process.”

As stocks tumble—and bring your net worth down with them—it’s tempting to flee the market entirely and retreat to more stable ground. But when it comes to dealing with your portfolio during times of volatility, Indiana Jones may have said it best: “Don’t look at it. Shut your eyes, Marion, and don’t look at it, no matter what happens.” Because if you do, you could end up making a decision you regret.

We’re not financial advisers, but actual financial advisers tend to agree. “Successful investors that I’ve seen over the years, they have a position where they paid $19,000 for Microsoft, and it’s now $125,000,” Farr told The Dispatch. “They never sold it no matter what the market did. You buy really good companies, you hold ‘em a really long time. And that’s what you do.”

Empty Bottles

There’s a baby formula shortage in the U.S., and it’s likely to get worse for a few weeks before it gets better.

The pandemic-related labor shortages and transportation hiccups that hit most sectors of the economy last year only squeezed formula manufacturers’ supply chains a bit—data company Datasembly reported stores’ out-of-stock rate in 2021 stayed mostly normal, ticking up slightly in January 2022. But baby formula powerhouse Abbott Nutrition recalled several popular powdered formulas in February, shutting down its plant in Sturgis, Michigan, because two infants died from bacterial infections after consuming formula made there. The company maintains its products didn’t cause the infections, and FDA testing at the plant found similar bacteria, but not the exact strain that infected the babies.

A few heavy hitters dominate U.S. baby formula sales—Abbott alone corners about 42 percent of the market. That’s thanks in part to regulations and tariffs discouraging overseas manufacturers from selling in the U.S., and in part government subsidy programs that service about half the nation’s infants. Companies tend to offer steep discounts to win these government contracts, and use that dominant market share to make profits on other sales. Formula companies pretty much know how much product they’re going to sell each month—the baby population doesn’t fluctuate that much—so they’re incentivized to run lean supply chains with little slack to accommodate changing demand. 

That works fine until a major plant goes down and demand for everyone else’s products spikes. Other formula companies began running 24-hour production lines—and Abbott has been flying in formula from an FDA-approved facility in Ireland—but it’s hard to adjust to new market conditions overnight. “There are huge resource constraints on bringing additional manufacturing capacity on line, especially in the short term,” University of Minnesota supply chain professor Rachna Shah told The Dispatch, noting that FDA-mandated inspections and manufacturing standards make it difficult to quickly increase production.

The recall kicked off widespread shortages that have been grabbing headlines and worrying parents. But analysts disagree on exactly how widespread this newfound scarcity is. Datasembly estimated a 40 percent out of stock rate in late April, which it said climbed to 43 percent last week. IRE, a research firm, pegged the late-April figure at 20 percent, strategic analytics head Krishnakumar Davey told The Dispatch, still double the typical rate. 

Either way, it’s a bad situation. Retailers have begun setting limits on how much formula customers can buy. Resale prices are shooting through the roof on eBay. Parents are forced to drive store to store to find food for their newborns. And panic buying is likely making the shortages even worse. “Notably, more infant formula was purchased in the month of April than in the month prior to the recall,” the FDA said Tuesday.

Abbott announced a series of safety updates to its systems and protocols in a statement yesterday, and said it could restart the Sturgis plant within two weeks of FDA approval. But it’ll take an additional six to eight weeks after the site is reopened for products to hit shelves, and the FDA hasn’t announced exactly when it expects to give the all-clear. 

In the meantime, many parents can supplement older babies’ diets with milk, or switch formula brands to whatever’s available. (Pediatricians discourage watered down or homemade formula, which can cause dangerous nutrition imbalances.) But lactose intolerant babies can’t consume common milk-based formulas, and a small percentage of babies have severe intestinal or allergy conditions that require highly specialized formula—which Abbott only makes at the closed plant. The FDA has allowed Abbott to release that formula to parents on a case-by-case basis. “For babies who need this formula to survive, obviously you do what you have to do,” said Dr. Steven Abrams, a pediatric specialist and professor at the University of Texas, noting the likelihood of bacterial infection is very small. “The benefit exceeds the risk.”

Several lawmakers have raised concerns in recent days about the FDA’s delay in opening an investigation into the plant after complaints surfaced last fall, and dinged the agency for its inability to work with companies to ensure shelves are stocked. “In its attempt to balance safety from contaminated product and safe infant development through formula access, FDA is achieving neither objective,” Sen. Mitt Romney wrote to the agency Tuesday. “I am deeply concerned about the apparent lack of an effective mitigation strategy.”

The House Energy and Commerce committee announced Tuesday it will hold an oversight hearing on the shortage later this month. The committee didn’t specify what the hearing will focus on, but some analysts have suggested the U.S. might consider stockpiling shelf-stable formulas to avoid future shortages. “There could be a chance for us to have certain systems in place that could prevent us from seeing this again,” Rudolph Leuschner, an associate professor of supply chain management at Rutgers University, told The Dispatch. “We do keep stockpiles of crude oil around. Pharmaceuticals companies have to maintain six weeks supplies of certain ingredients and finished product. Do we need some buffers built in here?”

Worth Your Time

• Has the United States’ response to Russia’s invasion of Ukraine helped assuage international concerns about American stability on the world stage? “Foreign policy has become the continuation of domestic politics by other means. If the United States is unable to reach bipartisan agreement on fundamental issues of war and peace when the strategic and moral stakes are so clear, then there is little hope for consensus on the many other challenges it faces,” Mitchell Reiss writes for American Purpose. “Consider how complex and contentious these other challenges are: Iran’s nuclear ambitions, North Korea’s growing nuclear arsenal, China, global warming and other environmental issues, human rights, cyberwarfare, and the incipient militarization of space. … The two major U.S. political parties have significant strategic differences in how they see the world and America’s place in it. These are not just tactical disagreements about a shared vision; these are core disagreements linked to competing philosophies, values, and the role of government. U.S. foreign policy will continue to oscillate wildly depending on whether the Democrats or Republicans occupy the White House and control Congress.”

• Former Chicago Bears running back Tarik Cohen penned a heart-wrenching letter to his younger self in The Players’ Tribune, touching on failure and success, the loss of his brother, mental health, and more. It’s an important reminder not to assume to know what others are going through. “You’ll be playing a ton for the Bears and putting up numbers—rushing, receiving, returns, even throwing passes for TDs. You’ll be all over SportsCenter. People will be adding you to their fantasy teams like crazy,” he writes. “[But] Tyrell is gone. Dante is no longer able to walk. You’ll be filled with sadness, but also with guilt. The guilt is overwhelming, just questioning all these different decisions, all these big and small choices. Maybe you should’ve gone with them back in high school. Why didn’t you just move everyone up to Chicago with you when you got drafted?! What if you had sent even more money home? Did you call them enough? Should you have paused football at some point and just gone home for a year to get things in check? Just question after question, everything second-guessed.”

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Toeing the Company Line

• For additional information on the baby formula shortage—but with more charts!—be sure to check out this week’s Capitolism (🔒). “The infant formula crisis isn’t simply another case of a one-off event causing pandemic-related supply chain pressures to boil over,” Scott writes. “Instead, U.S. policy has exacerbated the nation’s infant formula problem by depressing potential supply.”

• American Enterprise Institute senior fellow Beth Akers dropped by The Remnant on Wednesday for a conversation with Jonah about student debt and the economics of higher education. Can a moral argument be made for student loan forgiveness? Are most graduate programs pointless? How can we fix America’s universities?

• On this week’s episode of the Dispatch Podcast, Steve talks with New York Times reporters Jonathan Martin and Alex Burns about This Will Not Pass, their new book on the end of Donald Trump’s presidency and the first year of the Biden administration. From the now-infamous Kevin McCarthy recordings, to Joe Biden’s relationship with moderate Democrats, there’s plenty to talk about.

• In politics, everyone’s a hypocrite. “There are differences between organized mobs trying to intimidate legislators into stealing an election and organized mobs trying to intimidate Supreme Court justices out of a ruling,” Jonah writes in yesterday’s G-File (🔒). “Reasonable people can say one is worse than the other, but I’m incapable of seeing how a reasonable person can argue one effort is good and the other is bad. Both are terrible.”

• On the site today, Danielle Pletka unpacks the causes of a spate of recent terror attacks in Israel and advocates for realism in our approach with Palestinians. Andrew Fink explains what Russian President Vladimir Putin means when he uses the phrase “American exceptionalism.” And Jacob Becker says President William Howard Taft’s rejection of Arizona’s state constitution contains lessons for our current political moment.

Let Us Know

If you have a stock portfolio, do you check it every day? Have the past few months of volatility led you to rethink your investment strategy?