Timely and Relevant News: Inflation Rattles the Market
The Dow closed down 1.4% or 474 points on Tuesday and another 2% or 682 points on Wednesday as inflation concerns rattled the market and volatility continued.
It is important to remember that a moderate amount of inflation is generally considered to be a sign of a healthy economy because as the economy grows - the demand for goods and services increases and wages usually also increase.
When Inflation Becomes a Problem
With that being said, inflation is one of the primary risks to cash hoarders and bondholders. Too much inflation reduces the future purchasing power of the dollar. Accelerated inflation typically drives interest rates up, which negatively impacts bond prices due to the inverse relationship between the two.
A Shift In The Market
Lower interest rates enjoyed in the US for the past several years have justified higher multiples for stock prices – particularly for growth stocks. Inversely, higher interest rates will warrant lower multiples on stocks. Growth stocks were attractive to many investors last year during the start of the COVID-19 pandemic when interest rates were low. With rising interest rates, we have seen a rotation in the market from growth to cyclical value stocks.
Consumer Price Index (CPI) and Other Important Signals
The Consumer Price Index, which measures goods as well as energy and housing costs, rose 4.2% from a year earlier. A Dow Jones survey had expected a 3.6% increase. The month-to-month gain was 0.8%, against the expected 0.2%.
Lumber prices alone have risen 124% in 2021 amid persistent demand for building materials. Used car and truck prices, which are seen as a key inflation indicator surged 21%, including a 10% increase in April alone. Home prices have also risen sharply throughout the country. This is leading to a sharp increase in rental rates for non-homeowners.
One other reason for the current inflation phenomenon is the “base effect”. At this time a year ago, the economy was hit with the worst of the COVID-19 pandemic and inflation was unusually low – even turning negative in some cases for a period of time. For the next several months, year-over-year comparisons to those depressed base months from a year ago are going to be distorted because of the pandemic’s impact.
Our investment committee continues to closely monitor both market fundamentals and technicals, while making tactical shifts as needed. It is important to not lose sight of your long-term goals and to maintain your perspective in the midst of market ups and downs.
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