On Groundhog Day, Wednesday, Feb. 2, Punxsutawney Phil saw his shadow, predicting that there will be at least six weeks of winter weather ahead of us. Given the market action of the last few days, can we expect inclement weather ahead for market bulls as well?

 

Last week, I warned readers to expect the stock market to bounce. It did, retracing 50 percent of the market's decline in just about four days. I also warned that investors should not get comfortable with this bounce because after the bounce markets should go south once again. That prediction seems to be playing out.

 

It would be an understatement to say that markets remain volatile in both the stock and bond markets. Commodities, the currency and crypto markets are also gyrating like a championship bronco.

 

Part of the problem lies with the FANG stocks. These large-cap mega companies account for so much of the major averages and indexes, that when one or another of these stocks catch a cold, the markets catch pneumonia. Most recently Meta (formerly known as Facebook) missed earnings and gave poor guidance on Wednesday night. The stock dropped more than 22 percent overnight. It was the single largest loss of dollar value for a public company in U.S. history. All the major averages declined with it, with the NASDAQ falling 2.25 percent, while the S&P 599 Index fell almost 1.5 percent.

 

Just the day before, Alphabet (Google) did the opposite, gaining 20 percent on stellar earnings and took the indexes for a major rise upwards. On Thursday, Amazon surprised investors with what looked like a massive beat on earnings and gained 11 percent in overnight trading. At first the U.S. indexes traded more than a percentage point higher but gave that all back by the opening on Friday morning, and so did the markets.

 

Overall, corporate earnings have held up with roughly 75 percent beating numbers, but down from 82 percent last quarter. The size of the beats, compared to the last few quarters, have been anemic, while the number of revisions upward in future earnings have been few and far between. Obviously, none of this has been enough to hold up the stock market, let alone propel it higher. I warned investors that would turn out to be the case more than a month ago.

 

The omicron variant is evidently not taking its toll on the job market yet, according to the latest payroll numbers. Friday's employment numbers saw 467,000 job gains versus the forecasts of only 110,000 gains.

 

Investors, rather than celebrate the job gains, saw them as proof that inflation is still climbing. Wages, a key element of the inflation equation, continued to move higher. The Ten-year U.S. Treasury bond spiked higher on the news to more than 1.90 percent. My target, as I have advised investors in the past, is a 2 percent yield on the "Tens" in the short-term.

 

But let's get to the meat of this column — the markets, where now, given that my forecast that the markets would see a 10-20 percent correction between mid-January and February. That prediction has been accomplished at this point. I also signaled that we would bounce this week and we have. At its height the bounce retraced 61 percent of the losses on the S&P 500 Index. But I also warned that we should not get too comfortable with this bounce. The last two days brought this point home to those who doubted that warning. Now what?

 

The stock market took less than half the time to recoup 61 percent of its losses. Since then, the volatility has exploded both up and down. This volatility will continue. Next week, for example, we could see a similar pattern as last week — up for a few days, and then down.

 

 In situations like this, over the longer term, we can expect to see a large "W" pattern in the market's behavior. We are about halfway through this pattern. At a bare minimum, we should see the markets (S&P 500 Index) retest its recent lows of 4,222 (on January 24, 2022). But it doesn't have to stop there. As I wrote two weeks ago, we could see a decline to 4,070 if investors begin to panic. But we could also see a higher low as well. Right now, the markets are in a state of indecision.

 

Given this potential scenario, I don't believe it is time to be a hero. If we retest the recent lows, sure, put a little money to work, but don't bet the house. From there, if it goes lower, start averaging in. The same maneuver could be applied on the upside as well, if 4,222 is truly the bottom. How will you know? Keep reading my columns.

 

Fifty dollars may be an exaggeration, unless you frequent some high-priced restaurants in Manhattan. But consumers should be prepared. Beef prices, for the foreseeable future, will continue to climb.

 

Some cuts of meat are already up 25 percent from where they were six months ago. As the cook in the house, I usually buy a prime rib roast for New Year's dinner, but not this year. The cost for said morsel doubled in price since last year. I bought Australian lamb instead, which was much more reasonable, but just not the same.

 

I assumed that the price of beef, like almost every other food product, was going up due to supply shortages caused by the pandemic. I knew that as the number of COVID cases climbed and businesses started to shut down, there was a run on everything from toilet paper to steaks.

 

In my neighborhood (back at the start of the pandemic), consumers flocked to the wholesale stores and supermarkets to buy what meat they could and stock up their freezers. At one point, rationing became a commonplace tool in controlling the consumption of beef, pork, and chicken in a tight market.

 

One of the major bottlenecks was in the slaughtering and processing part of the business. More than 59,000 meatpacking workers were infected by coronavirus and 250 lost their lives, according to a government investigation. Since then, turnover has been high in this labor-tight market, where low wages and poor working conditions are prevalent. All of these issues have contributed to higher costs.

 

Climate change has also become a bigger factor in the production of beef. Drought, now a constant companion to ranchers and farmers, last year squeezed supplies of feed for cattle in the Northern Plains. It was so bad that some ranchers were forced to sell even breeding stock to slaughterhouses. This reduced the overall herd of beef by 2 percent, according to the Department of Agriculture.

 

Now, the southern part of the Plains is experiencing a deepening drought. It is here that most of the cattle in the U.S. is raised. That is expected to reduce the cattle stock even further, marking three straight years of declines and the smallest herd since 2016.

 

You might think that America's ranchers and farmers are in "hog heaven" as a result of these skyrocketing prices for beef at the supermarket, but you would be mistaken. Cattle ranchers receive about 37 cents on every dollar spent on beef, according to federal data.

 

As input costs for everything from gasoline to livestock feed keep rising, the ranchers' portion of profits drop even further. The sad fact is that drought is forcing more and more ranchers to reduce their herds, which has caused a glut of product at the slaughterhouses. That, in turn, causes the price the processors are willing to pay to plummet. But those price declines never show up at the grocery store. Why?

 

It can be summed up in four names — Tyson Foods, Cargill, National Beef Packing Co. and JBS — together, these conglomerates now dominate the meatpacking industry with an 85 percent market share. Over several decades, through mergers and acquisitions and a lax attitude toward competition by regulators, the meat-packing industry became an oligopoly. Once that was accomplished, these four remaining companies, in the name of efficiency, cut their capacity to process beef, closing slaughterhouses, and processing plants across the nation.

 

As a result, profit margins improved. Company stock prices improved, but ranchers and farmers were increasingly forced to accept whatever prices the processors were willing to pay for their product. Over time, this oligopoly was able to first influence prices and then dictate what they were willing to pay ranchers for their herds. It worked. The four meat packing companies identified above, for example, saw their profit margins jump 300 percent last year.

 

So, you might ask, who is making money from these steadily climbing meat prices? The government is asking the same question. Last month, the Federal Trade Commission opened an inquiry into how anticompetitive practices by major companies have contributed to supply chain problems.

 

As for the meatpackers, Senior White House economists Brian Deese, Sameera Fazili and Bharat Ramamurti, in a blog post in December 2021, explained it this way:

 

"Here is the bottom line: the meat price increases we are seeing are not just the natural consequences of supply and demand in a free market — they are also the result of corporate decisions to take advantage of their market power in an uncompetitive market, to the detriment of consumers, farmers, and ranchers, and our economy."