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Inflation: How long can consumers keep spending amid rising prices?

In this article:
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TKer.co Editor Sam Ro joins Yahoo Finance Live to weigh in on the impact inflation may be expected to have on markets, retailers, consumers and workers re-joining the labor force.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: If there's one theme from this week's avalanche of retail earnings, it's that consumers seem to be handling inflation rather well. And the market realizes it, considering the S&P 500 continues to touch new records. But can these feel good vibes on inflation continuing to not be a huge issue for stocks continue. Let's welcome back our old friend, Sam Ro. The founder and editor of Ticker.co. I should note that Sam is a former colleague and a founding member of the modern day, Yahoo Finance. Sam, good to see you again here.

I caught your tweet this morning calling out an inflationary Thanksgiving season. This is something I saw, let's bring this photo up here. In my trip to the local supermarket, with a $72 Bell & Evans turkey here, I think that's inflationary. Julie, maybe not necessarily so. But are you surprised as an astute market watcher that the market continues to shake off these very high inflation readings and touch new records?

SAM RO: Yeah. No. Well, first of all, it's good to see everybody. This is a lot of fun. But to your first point, I think there's no question this is inflation. And yes, the prices of stuff are going up. But how long will the market continue to shake it off? I think the market continues to shake it off as long as consumers continue to buy all this stuff. I mean, I think that's the lesson from this week's retail sales report, that's something we learned from Walmart earnings, from Target earnings, from TJX earnings is that even as these retailers are raising these prices, these consumers are going out and shopping. And they're still buying this stuff.

People are outraged by turkey prices and the price and the cost of Thanksgiving going up by 14%, but they're still checking out, and they're still buying all this stuff because it turns out that many people can actually afford it. And some people can afford it increasingly.

JULIE HYMAN: I think a better check, Sam, will be if Sozz goes back to the store and finds that turkey unsold, if no one bought it. I don't deny there's inflation, I just don't think that that is the best example of everyday inflation that people are seeing. Most people are not buying that gigantic of a turkey, and they're probably not buying a Bell & Evans turkey either. But, in any case, I won't drag you into the debate that Mr. Sozzi and I have been having.

SAM RO: I've been watching the show. I've been watching the show, so I'm very familiar with this.

JULIE HYMAN: Yes, I'm sure that you are. So, OK, so people are spending, despite how they are feeling about this higher inflation. I guess the question we're all asking is, and I'm sure you're asking it too, is does at some point, does that roll over? Does that change? I mean, if anything, it seems like prices are going to give before consumers' willingness and ability to spend is going to give.

SAM RO: Yeah. I mean, I think you nailed it. I think there are those two forces that are at play here, right? How long can the consumer continue to pay at increasing prices, especially when for a lot of consumers prices might be increasing faster than their wages.

Well, one of the big stories that I think doesn't really get covered enough from since the beginning of the pandemic is this whole concept of excess savings, right? The amount of money that consumers save during the pandemic because they couldn't go out and they couldn't take their vacations, they couldn't go out to the movies, they weren't going up to restaurants.

And then on top of that, all the fiscal stimulus and aid that came into people's paychecks, into their bank accounts and stuff. And consumers accumulated-- there's dozens of different estimates of this, but somewhere between $2 trillion and $2.5 trillion in excess aid, more than what they would have saved during normal times.

And so, this is part of what appears to be financing some of this inflation. And, of course, that stuff can't last forever. And, eventually, that money starts to run out. And then, things do become tighter for some folks. Well, it also happens to be the case that a lot of people who are tapping into this excess savings are people who are actually sitting on the sidelines of the workforce.

So you have this weird dynamic where, yes, people can afford to pay at increasing prices, but as they become less able to, there's also an increasing chance that they're going to re-enter the labor force and start filling some of these 10 million jobs that we have open. And, remember, a lot of this inflation stuff that we're talking about is because of supply chain issues and labor shortages and stuff like that.

So, as these people start to run out of money and have to go back to work, then suddenly all these places that are short-staffed are going to have labor. And that begins to solve the inflation problem on itself.

BRIAN SOZZI: I know, Sam, you're somewhat of a market historian. And the reality is next year we're probably getting one interest rate increase, perhaps, due to these inflationary levels. Maybe two with the second one coming in November. I mean, do you think the markets can still rally, even as we start to worry all the next year about a potential rate hike?

SAM RO: Yeah, for sure. I mean, in theory, right, when you start to raise the cost of capital, then you apply discount rates. And we can go into discounted cash flow analysis and all that good stuff, but when it comes to the actual sort of market behavior and the behavior of investors and traders and all of this stuff, what they care about is certainty and uncertainty, right?

And something that we are seeing in Fed funds, futures, curves, and all this stuff is that there's a lot of people talking about rate hikes. And there's a lot of people already betting on rate hikes. So this is one of the most well telegraphed, well communicated events that hasn't happened yet, but everyone's already talking about it. So you've got to wonder to what degree that's already been priced at. So that's one thing.

And two, there was actually an interesting note that was circulated this morning from a Yahoo Finance friend, from that Data Trek research. And they actually published a note that said in the last 30 years during rate hike cycles, there have only been two years when the stock market has gone down while interest rates were going up.

There's a whole lot of nuance to these conversations, but we have to remember that rate hikes is actually the effect of something good. They're raising interest rates because they believe the economy has some momentum, that the economy is big enough that it is growing at enough of a pace that it can withstand interest rate hikes.

So, if anything, while interest rate hikes present a risk, you also have to remember that it's happening in a very positive economic backdrop. Like, they wouldn't be doing this if things were crummy.

JULIE HYMAN: That is a great reminder, Sam. But it's one that there are certainly people who are calling for stocks to pull back next year, even as rates go up. You wrote about one of those notes in a recent newsletter where you pinpointed what's going on with Morgan Stanley.

Now, those of us who have worked with you or read your stuff for any length of time know that you were a big one for rules. And your rules are pretty wise rules for life and for markets. And so, you also wrote about in that same newsletter that you talked about, that Morgan Stanley call, you talked about some of your rules and how they kind of tie together.

SAM RO: Sure. Yeah, I think first of all, making a one year price target on anything is just fraught with uncertainty. And even when you speak with a lot of these strategists, they understand that the likelihood of them ever nailing any of these calls is very low.

That said, you a 6% decline in a given year might matter for folks who are very close to retirement or you work in some sort of institutional money management function where every little percentage point counts. But for folks who are, sort of, long term investors and long term thinkers, a 6% down year is part of the deal of being invested into something like the stock market, or even you a business. Like, this is something Warren Buffett would tell you about, right?

He always talks about buying farmland or investing in farmland. You can't just go back and forth and make your decisions based off of what you think is going to happen tomorrow, but rather you should be thinking much more long term. But I think probably the most controversial thing that I've said in that entire piece, though, is that down 6% in a given year is arguably bullish. Because if you look at the market history, in an average year, the S&P 500 will see a drawdown, a max drawdown of about 14%.

And that's even in bull markets. So, if we have a bull market where we have a year where the market only goes down 6% from the top to the bottom, and that's actually an incredibly positive thing to be saying about what's going on in the stock market.

BRIAN SOZZI: Sam, before we sadly let you go here, again, what are you up to at "The Ticker."

SAM RO: Oh, yeah. I'm glad you asked. So "Ticker" is a newsletter that has a free weekly edition that goes out on Sundays. And sometimes, I'll publish a couple of times during the week. The main aim for "Ticker" is to focus on news and data that inform the longer term themes in the markets and the economy.

So it's less about what is moving markets intraday and during the week and whatever, which I'm a huge fan of. But over time, I've gotten a lot of feedback from people on Twitter or readers or people that I meet on the street, or through family and friends who you know are looking for a place where they can be up-to-date on information that informs things like their 401k plans and their retirements and their kid's 529's and whatever.

And sometimes it can be difficult to find those stories, considering the amount of news that is out there. So that's what I'm providing. It's a small audience, but a very engaged audience. And I'm glad to be serving them.

BRIAN SOZZI: No, you're modest, Sam. It's a ginormous audience. And it's good to see you on that beat here. Make sure to put a hyperlink of this clip in your newsletter before you send it out. Sam Ro, founder and editor of the Ticker.co. Happy Thanksgiving. We'll see you soon, my friend.