This Week in Review | IPOs, US Inflation, ECB Rate Hike

Transcript

Rachael Green:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. Now, let's review what happened this week.

First, IPO updates.

After months of anticipation, SpaceX went public today. It's the first of several mega-IPOs, or initial public offerings, expected this year. We'll be watching closely to see how investors respond to the over 500 million newly-released shares. After all, like any other commodity, stock prices are ultimately driven by supply and demand. An IPO works by instantly increasing the total number of shares in the market, adding to what's called "equity supply." When supply rises, as it just did today, it can put downward pressure on overall stock prices if demand holds steady. Said differently, if too many stocks outweigh demand, prices can fall. But on the flip side, when demand is strong and grows faster than supply, prices rise. When analyzing these supply trends, there are other components to consider as well. For example, we're currently experiencing a record number of announced stock buybacks. This is when firms buy back their own shares, reducing equity supply. These announcements totaled over $500 billion in April and May alone, led by tech. If this continues, net equity supply may not change as dramatically as many expect, despite forthcoming mega-IPOs. On the other hand, companies often buy back less than authorized or may carry out buybacks over an extended period of time. With new issuances increasing supply all at once, buybacks may not offset this year's mega-IPOs as much as headline figures might suggest. These are factors we'll be monitoring this year and next. As we do, it bears noting that most equity supply growth in developed markets has been confined to the US, while overseas supply has been shrinking. That's one reason we're more bullish about developed markets outside the US in 2026. The debut of SpaceX may also reveal something about markets beyond net equity trends. We're talking about sentiment, as excessive enthusiasm for new stocks can signal investor euphoria. Such excitement is a sign we may be entering the final phase of this bull market, but it isn't like ringing an alarm. A mature bull market can still go on for years. That's why, as SpaceX dominates headlines, we believe the best thing to do is stay disciplined and well-diversified. Remember, most new listings pop on debut and then come back down to earth, trailing the market and peer companies over the next few years.

Next, US inflation. On Wednesday, we got the latest US Consumer Price Index, or CPI, numbers for this May. This month's report revealed the headline inflation rate rose 4.2% year over year in May, in line with analysts' expectations. This was the highest since April of 2023 and the third consecutive month of headline inflation growth. In May's inflation report, gasoline prices rose 40.5% year over year, with energy price increases accounting for over 60% of the monthly gains in inflation. With oil prices still high due to the escalating war in Iran, many families are experiencing real stress at the gas station and grocery store. We empathize that war is always tragic, and rising costs for necessities can be challenging. But, despite the recent spike, we do not believe a sustained bout of high inflation is likely. Although the price of some goods may temporarily spike, consumers often substitute their spending for cheaper alternatives or spend less on luxury items. In order to get sustained inflation across a range of goods and services, we need to see a rapid increase in global money supply. And today, money supply growth looks fairly tame. Additionally, given May's reading was in line with expectations, markets have likely already priced in this information. Inflation expectations had already risen earlier in the year, with University of Michigan's one-year-ahead inflation expectations sitting at 4.8% in May. When reality matches what investors anticipate, the surprise power for markets is limited. And while some investors may fear higher inflation, stocks have historically performed fine across different inflationary periods. We think stocks should continue performing the same way during this bout of inflation. The prudent thing to do would be to stay invested and not overreact to one month's inflation reading.

Finally, the European Central Bank.

On Thursday, the European Central Bank, or ECB, hiked rates for the first time in nearly three years. The ECB raised its key policy rate 25 basis points to 2.25% in response to rising eurozone inflation driven by the Iran war. This rate hike was widely expected, as April's ECB meeting minutes revealed a number of the bank's members saw the decision to leave rates unchanged as a close call, and indicated that they would have supported a rate hike. With energy costs in the eurozone still high, Thursday's meeting was a chance for members to re-emphasize their commitment to anchoring inflation at the 2% medium-term target. To us, that's a sign the ECB and other central banks are hung up on 2022, when inflation spiked alongside surging oil and natural gas prices, following Russia's invasion of Ukraine. As we mentioned earlier, money supply growth is what drives sustained inflation and absent central banks growing the money supply, the ECB's decision to try and fight inflation through a rate hike seems unnecessary to us. All that to say, the risk worth watching isn't inflation itself. It's whether central banks overshoot the mark by hiking rates for the wrong reasons and invert the yield curve. We aren't close to that point now, and bond markets appear to be reacting as we would expect.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series Three Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com any time for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit like and subscribe.