Today’s release of May’s Consumer Price Index report from the Bureau of Labor Statistics showed a higher than expected 1% rise in consumer prices from the prior month, which translates into an 8.6% year over year increase, the highest reading since 1981.  The Core CPI reading, which strips out the more volatile food & energy components, rose 0.6% MoM, and is up 6.0% YoY.  All components of the Index are measurably higher than one year ago, and there are few signs that high prices will abate any time soon.

Source: Bloomberg

This report will increase the pressure on the Federal Reserve, which meets next week and is widely expected to hike the short-term Federal Funds rate by 50 basis points to 1.5%.  As we write, the 2-year Treasury note yield has risen by 14 basis points on the day, reflecting investor fear over this Fed’s ability to control inflation.  Essentially, markets are doubtful Chair Powell has the COURAGE to pull a Paul Volcker and essentially squash inflation by dramatically raising interest rates, thereby throwing the US economy into an almost guaranteed recession.  Certainly, that would take political courage ahead of mid-term elections.

Dissecting the above chart a bit, the underlying “food at home” index has risen 12% YoY, with “meats, poultry, fish and eggs” up 14.2% (the index for eggs – yes, there is such a thing – is up 32% YoY!).  The index for “food away from home” has risen 7.4% from a year ago while that for “full service meals” rose 9%.

The Energy index rose 3.9% in May and has risen 35% over the past 12 months, with the Russia/Ukraine war a proximal cause, and U.S. energy policy a close second.  Gasoline prices rose 7.8% in May while the index for natural gas rose 8.0% on the month.  The index for fuel oil has risen 106% YoY, the largest such move in the history of the series dating back to 1935.

We could go on through the Services (shelter, transportation & medical care) and Goods sectors with similarly shocking prices moves.  However, anyone traveling, car shopping, or eating (whether at home or dining out) knows that prices are rising at a dramatic rate.  Sadly, there is perhaps no more punitive tax on the poor than inflation.  Despite rising wages all along the pay scale, price increases are eclipsing wage gains.

Moreover, the impact of inflation isn’t just on consumer prices, but assets of all types.  Stocks, bonds, real estate, and private equity – they all derive their value based on an underlying interest rate – the discount rate.  When that rises, the present value falls.  Every business school in the world teaches that.  Those companies that are losing money, or project profitability to be some years away, have seen their share prices “adjusted” the most.  Many profitable, dividend-paying companies less so.

For investors, inflation is presenting both risk and opportunity.  The risk is reflected in declining asset values, while the opportunity is presented in a more compelling fixed-income universe.  Investments such as municipal bonds and high-grade corporate bonds, virtually un-investable a year ago as interest rates plumbed historical depths, are now very interesting, bordering on compelling.  With the probability of further rate hikes high, this should only enhance the attractiveness of bonds relative to stocks going forward.

With all of the uncertainty facing investors right now, we think staying diversified, liquid and nimble makes a lot of sense.  Diversification will help hedge against the unexpected drawdown in a specific sector, while liquidity can offer investors an opportunity to put money to work if prices really move.  Lastly, by remaining nimble and intellectually flexible, investors may remain open to asset allocation adjustments should compelling opportunities present themselves. Heightened volatility can elevate investor anxiety and often lead to poor decision-making.  Nottingham remains at the ready to help guide you through these turbulent markets.  Please know our entire team is working hard every day to try and make sense of today’s changing market environment and ensuring our clients long-term objectives remain attainable.  Your financial goals remain our primary focus, so please don’t hesitate to reach out with questions or concerns.

Larry Whistler, CFA
President

Larry joined Nottingham in 2006 and heads the Investment Policy Committee, along with portfolio and relationship management responsibilities. Prior to joining Nottingham in 2006, Larry worked as an independent RIA for two years, and before that spent a decade as a bond trader for Merrill Lynch Capital Markets in Los Angeles and New York City.

Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.

For more information about Nottingham’s offerings, visit www.nottinghamadvisors.com or call 716-633-3800.

Nottingham Advisors, LLC (“Nottingham”) is an SEC registered investment adviser located in Amherst, New York.  Registration does not imply a certain level of skill or training.  Nottingham and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Nottingham maintains clients. Nottingham may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. For information pertaining to the registration status of Nottingham, please contact Nottingham or refer to the Investment Advisor Public Disclosure Website (www.adviserinfo.sec.gov). Any subsequent, direct communication by Nottingham with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

This newsletter is limited to the dissemination of general information pertaining to Nottingham’s investment advisory services.  As such nothing herein should be construed as the provision of personalized investment advice. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances.  Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Adhering to the assumptions, theories and principles serving the basis for the information contained herein should not be interpreted to provide a guarantee of future performance or a guarantee of achieving overall financial objectives. As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. Furthermore, this newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their dates.  As such, there is no guarantee that the views and opinions expressed in this article will come to pass. This newsletter should not be construed to limit or otherwise restrict Nottingham’s investment decisions.

This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore. Some portions of this newsletter include the use of charts or graphs. These are intended as visual aids only, and in no way should any client or prospective client interpret these visual aids as a method by which investment decisions should be made.  We have provided performance results of certain market indices for illustrative purposes only as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.  It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any benchmark index. A description of each index is available from us upon request.

Investing in the stock market involves gains and losses and may not be suitable for all investors. Past performance is no guarantee of future results.

For additional information about Nottingham, including fees and services, send for our Disclosure Brochure, Part 2A or Wrap Brochure, Part 2A Appendix 1 of our Form ADV using the contact information herein.