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Over the past 30 years, the purchasing power of the US Consumer Dollar has halved due to inflation. At the same time, the S&P 500 has risen 789% (7.6% annually) AFTER adjusting for inflation. Why you need to invest for the long term, in one chart…
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The most important charts and themes in markets and investing…
1) Inflation Correction
The US stock market has now fallen 5.4% from its January peak, marking its 32nd correction since its March 2009 bottom.
What’s different about this correction?
Bonds also moved lower as inflation expectations and interest rates have risen since the start of the Iran war.
While Gasoline (+74% YTD) and Crude Oil (+69% YTD) prices have surged higher, both stocks and bonds are now down on the year.
This is a milder version of what we saw in the bear market in 2022, when stocks and bonds fell as inflation in the US surged to its highest level in 40 years.
What are the leading sectors in 2022?
Energy, as Crude Oil surged well above $100/barrel after Russia invaded Ukraine and gas prices hit record highs (above $5.00/gallon). And Energy is once again the leading sector today, up 29% compared to last year.
What’s left behind? Technology (-5%), Consumer Discretionary (-7%), and Finance (-11%).
Why are Consumer Discretionary stocks taking a hit?
Expectations that higher gas prices will reduce discretionary spending. The math is simple: the more you spend at gas stations, the less you have to spend elsewhere (travel, restaurants, clothing, etc.).
The average price of gasoline in the US has jumped to $3.79/gallon, a 30% increase over last month. This is the largest single month spike we have seen in the last 30 years.
What is the reason? The supply shock was caused by the continued closure of the Strait of Hormuz (20% of global oil supply passes through the Strait). Crude Oil prices have risen 47% over the past two weeks, the 2nd largest 2-week spike on record.
2) Why Are Stocks So Resilient?
Despite all the turmoil in recent weeks, the S&P 500 is only down 3% on the year while Value stocks, International stocks, and Small/Mid Cap stocks are still up on the year.
Why are stocks so resilient?
My best guess is that investors are assuming that the Crude Oil surge is only temporary and that the Iran War will end soon. If this happens, investors will ignore the existing conflict and focus on the company’s income.
And those returns remain strong, with S&P 500 earnings once again hitting a record high in the 4th quarter of 2025, up 13% year over year.
Judging by the 2026 outlook (a very strong 16% earnings growth according to FactSet), investors appear to be betting on little to no revenue decline due to the war.
But what happens if investors are wrong and earnings don’t meet those high expectations?
The market will be in a vulnerable position, with the S&P 500’s P/E entering the year at 26. That’s 40% above the historical median (18.6) going back to 1988.
3) Don’t Try This at Home
In the first 5 months of Fiscal Year 2026, the US Federal Government received $2.1 trillion and spent $3.1 trillion. That’s a $1 trillion deficit.
Why does this happen, year after year?
Milton Friedman said it best:
“If I spend other people’s money on other people, I don’t care how much it is, and I don’t worry about what I get. And that’s the government.”
What impact did the Iran War have on the deficit? Because we don’t raise taxes to fund it, the deficit will widen. The longer the war lasts, the greater its impact will be.
In the first 12 days, the estimated cost was $16.5 billion and some say future costs could reach $1 billion per day.
But the actual impact of war is very difficult to predict (especially because you don’t know how long it will last) and is often underestimated.
One example: in 2003, the Bush administration estimated the cost of the Iraq war at $50-$60 billion.
What is the actual cost?
More than $3 trillion.
3) Slipping, Sliding
Expectations for a Fed rate cut in 2026 are, according to Paul Simon, “sliding, sliding.”
At the beginning of the year, the market predicted that there would be two Fed rate cuts.
And today: only 1 cut, and not until the December meeting.
Why the change?
Rising inflation with expectations that we will see further increases in the future.
The Fed’s preferred inflation measure (Core PCE) rose to 3.1% in January, its highest level in 22 months. The reading was the 59th consecutive reading above the 2% target level set by the Fed.
The Cleveland Fed now forecasts a CPI inflation rate of 2.87% for March, up from 2.4% in February. This will be the 60th consecutive month (5 years in a row) with inflation above the Fed’s target of 2%.
And over the last 5 years, we’ve seen average CPI inflation exceed 2x the Fed’s target.
The March CPI report will likely show higher food price inflation in addition to Oil and Gas.
Why?
Fertilizer prices have risen to their highest level since October 2022, up 35% YoY. About a third of global fertilizer supplies pass through the Strait of Hormuz.
When the Fed meets tomorrow, they will hold interest rates steady at 3.50-3.75% and the market expects them to do the same in April (97% probability). What happens in June under a new Fed leader (most likely Kevin Warsh) will depend on what happens with inflation next. But currently, the bond market says that the Fed will continue to maintain this policy (77% probability).
4) More Affordable Housing
Home prices in the US increase 1% in 2025, the smallest increase since 2011.
With wages rising over 3% by 2025 and falling interest rates (30-year mortgage rates: 6.9% -> 6.2%), this makes the housing market a little more affordable for the average buyer.
I say “slightly” because after adjusting for inflation, prices are still very high and above the peak levels of the housing bubble in the mid-2000s.
This creates a wide gap (44%) between the number of sellers (1.96 million) and the number of buyers (1.36 million).
This means that, absent intervention from the Federal Reserve or Federal Government, we will see prices continue to move lower than inflation. The record appreciation above inflation rates that we saw in the first half of this decade is unsustainable. And the most powerful force in the market is mean reversal.
5) Some Interesting Statistics…
a) Total # of jobs in the US increased only 0.1% over the past year. In the last 50 years, similar labor market slowdowns have ONLY occurred during recessions (1974/1980/1981/1991/2001/2008/2020).
b) Data centers now consume about 7% of US electricity demand – up more than 10x in two decades.
c) There are currently 665,000 401(k) millionaires at Fidelity alone, a record high and more than double the number than three years ago.
d) The last 2 times BDC was in a bear market (2020 & 2022), the S&P 500 was also in a bear market. An interesting divergence today with the S&P 500 down just 5% from its January high.
e) All seven members of the Magnificent Seven experienced declines this year and underperformed the S&P 500.
And that’s all for this week. Thanks for reading!
Every week I create a video detailing the most important charts and themes in markets and investing. Subscribe to our YouTube channel HERE for the latest content.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosure here.
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