When Inflation Meets the Market: Understanding the Digestive Economy

The metaphorical “pig through the python” perfectly captures today’s market reality. That python—our domestic economy—is methodically processing the pig: inflation, the consequence of aggressive monetary tightening that began back in March. This digestive process moves slowly, and the strain shows across all asset classes.

Market Pressure Across the Board

Yesterday’s trading session exemplified this ongoing struggle. After three to four sessions of strong rebounds from year lows, equities took a step backward. The Dow posted a -0.30% loss despite reaching +399 points intraday before retreating -150 points at its low. Meanwhile, the S&P 500 declined -0.80%, and the Nasdaq fell -0.61%. Most notably, the Russell 2000 small-cap index lagged further, closing -1.19%—the second consecutive day of underperformance relative to larger benchmarks.

Bond markets tell an equally telling story. The 2-year yield surged to 4.6%, gaining half a percentage point in just one month, while the 10-year climbed to 4.235%. These levels reflect not just the Fed’s seven months of aggressive rate increases, but also market expectations that policymakers will continue tightening through the final 2022 meetings.

The Housing Market Tells the Inflation Story

Existing Home Sales for September dropped to 4.71 million, continuing a downward trend throughout the year from January’s seasonally adjusted 6.5 million units. September’s figures represent the lowest monthly reading since early 2020—a striking reminder of how far the housing sector has deteriorated. Higher borrowing costs have effectively closed doors for millions of potential buyers, dampening what was once a vibrant market.

Global Consequences of Currency Pressure

The ripple effects extend far beyond American borders. Corporate earnings reports reveal the cost of a strengthened dollar: IBM reported losing nearly $1 billion in quarterly revenues due to unfavorable currency conversion. Meanwhile, the Japanese yen has weakened to levels unseen since 1990, creating headwinds for multinational exporters and upending international trade dynamics.

This underscores a critical truth: when the Federal Reserve raises rates aggressively to combat domestic inflation, the consequences reverberate globally. The pig moving through the python doesn’t stop at the U.S. border.

When Guidance Disappoints: The Snap Case

Snap’s Q3 earnings provided a cautionary tale. The company delivered earnings of $0.08 per share—beating expectations of -$0.01 but falling far short of the prior year’s $0.17. While Daily Active Users expanded by 16 million to reach 363 million (exceeding consensus expectations), Average Revenue per User missed projections, coming in at $3.11.

The real blow: full-year revenue guidance implied flat growth. For a company already trading at just 4x sales (down from 40x at the year’s start) and struggling with user monetization, flat prospects shattered investor confidence. The stock plummeted over 20% after hours—reflecting how severely the market punishes growth stories caught in an inflationary, higher-rate environment.

What’s Ahead

As long as the Fed continues its tightening cycle and inflation remains elevated, the python continues its slow digestion of the pig. Market participants face a difficult reality: near-term volatility appears structural rather than cyclical, and recovery may require either inflation to meaningfully decline or economic growth to demonstrate surprising resilience despite higher borrowing costs.