Extortionate food prices: reality or election campaign rhetoric?

Recently, Kamala Harris suggested that if elected, she would enforce a ban on price gouging on food and groceries. Her goal is to reduce inflation, as food prices have risen by about 20% over the past four years. The Harris campaign says that price gouging “clear rules to make it clear that large companies cannot exploit consumers unfairly in order to excessive corporate profits for food and grocery shopping.”

Currently, many states have laws that prohibit companies from making excessive profits when there are sudden changes in the supply or demand for goods. For example, as part of hurricane preparedness, states are trying to prevent home improvement stores from raising the price of plywood. While such laws make sense, Harris’s proposal to combat price gouging is flawed.

The chart below shows Kroger’s profit margin of 3.50%. The profit margin of its competitors in the grocery retail industry is similar. Walmart and Costco, also competitors although they sell non-food items, have profit margins of 4.00% and 3.50%, respectively. The point is that many grocery stores and other food sellers do not make excessive profits. For comparison, the S&P 500 has an overall profit margin of about 12%.

If grocers were forced to cut prices, their already thin margins would force them to cut expenses. This would result in layoffs and store closures, which would hurt the economy. The problem of food inflation is not due to price gouging, but to excessive fiscal and monetary stimulus during the pandemic.

What to watch today

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Market trading update

As mentioned yesterdayThe recovery from recent lows has been swift and the momentum continued yesterday as markets now focus on all-time highs as the next resistance level. There is little to stop the rally at the moment as corporate share buybacks continue and trading programs need to accumulate around $10 billion a day by month-end.

However, things should calm down in September after the Jackson Hole summit (Powell speaks on Friday) and the election will take center stage. While we haven’t had the opportunity to increase our exposure, small dips can be used to rebalance portfolios. It’s worth noting that the oversold condition has largely reversed in the short term, so the upside move will likely become more difficult. Trade accordingly.

Number of bankruptcies increases

The following Bloomberg chart shows that the number of new Chapter 11 bankruptcies is increasing. During economic expansion, bankruptcies tend to fall. During or after a recession, however, they rise sharply. The recent increase puts the number of bankruptcies higher than before the pandemic.

Let’s hope it’s different this time!

SimpleVisor shows that market breadth has improved

The first chart, from SimpleVisor’s proprietary relative and absolute sector and factor analysis tool, shows that eight of the twelve sectors have relative values close to zero. The second chart highlights that many factors have similar relative values. Both charts show us that much of the market has been trading in line with the S&P 500. Therefore, market breadth is back to a more normal state. In the last five years that we have been doing this analysis, we have never seen such consistent breadth. So what’s next?

The third chart can provide some clues. The SimpleVisor 2 Symbol Money Flow Daily graphically depicts the price ratio of securities. In addition, SimpleVisor’s proprietary momentum model is displayed below the price ratio chart. We compared the equally weighted S&P 500 (RSP) to the S&P 500 (SPY). This pair is a good indicator of market breadth. The chart shows the recent outperformance of RSP over SPY. In addition, the SV momentum model is turning into a sell indicator. This suggests that SPY is likely to outperform RSP in the coming days.

If large-cap stocks dominate the performance again, SPY will beat RSP and the price ratio will continue to decline. However, this could be a pause before RSP continues to gain against SPY. Eventually, the ratio could start to stagnate and the SV indicator could hover around zero. If that happens, breadth will likely remain healthy.