Why Are The Markets So Volatile?
According to multiple news outlets, the stock market is off to its worst start for the year since 1939 (thru April). The most recent market sell-off has perhaps been more uncomfortable than others due to the fact that it’s a sharp contrast from the relatively smooth market ride we have witnessed since late March of 2020.
We believe much of the downturn comes from the concern over inflation and the ability of the Federal Reserve (Fed) to offset inflation without pushing the economy into recession.
Market Signals & Inflation
Inflation is becoming pervasive. You may have noticed if you have filled the gas tank of your vehicle or gone food shopping lately. The overall food index was up 9.4% in April vs. a year earlier. Overall energy prices rose 30.3%.
The housing market is often considered as a lagging indicator when looking at inflation. Real estate prices have been sharply increasing over the past year. For those who are renting and their lease has not yet come up for renewal - they have not yet experienced the recent sharp upturn in housing related inflation.
Two other important signals that we are paying close attention to as it relates to inflation are Consumer Price Index (CPI) and Producer Price Index (PPI).
CPI measures the average cost of goods and services that a consumer experiences and is the most well-known measure of inflation. CPI for the month of April came in at 8.3%. While it is encouraging that it was less than the CPI number for the month of March (8.5%), it was still higher than the forecasted 8.1% for April. CPI is generally considered to be a “lagging indicator” for inflation since it measures inflation after it appears.
PPI measures the average cost of goods and services that a producer incurs. If the producer's price is going up then it costs more for the producer to make the product so they will charge the consumer more. This concept is referred to as pricing power. Some businesses don’t have pricing power ability and are squeezed by labor, shipping and other costs. The earnings/profitability of those businesses are clearly at risk. PPI for the month of April came in at 11%. On a positive note, this was down from 11.2% in March. PPI is considered to be “leading indicator” and is closely watched by economists and government officials when forecasting economic cycles and policies.
Although PPI and CPI are calculated differently and measure different aspects of the economy, both are pointing to significant and continuing inflation for some time.
The Fed typically responds to inflation by raising the cost of borrowing — hiking interest rates. It is the responsibility of the Fed to provide a safe, flexible and stable monetary policy without pushing the economy into a recession – a very delicate balance. The Fed normally meets eight times a year to update its economic projections and longer-term forecasts. As detailed in our Fed’s Meeting Recap communication from earlier this year, the Fed communicated their expectations that there would be multiple rate hikes for 2022.
Our Covenant Wealth Strategies Investment Team is closely paying attention to market signals - including both fundamentals and technicals – in an effort to make wise and appropriate choices in our investment portfolios. We are also executing tax loss harvesting strategies in non-qualified accounts to take advantage of the recent market pullback.
If you have any changes to your investment objectives or questions about your financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.