Of course, investors are paying attention to how their portfolios are responding to inflation and rising interest rates. However, we believe the U.S. economy continues to show positive economic growth—this should allow stock prices to eventually stabilize.
The combination of the Federal Reserve’s efforts to slow inflation by raising interest rates and the consumer—whose sentiment has been soured by higher prices at the gas pump, grocery store, and more—has weighed on the market recently. It has even heightened talk of a recession, which we do not foresee for the next 9-12 months but is increasingly a probability for 2023.
Inflation is certainly a major contributor to recent volatility, and investors should consider the following:
- Rising prices are counterweight for consumers’ ability to continue to spend at the pace they have been able to. The importance of consumer spending on the overall economy—representing some 70% of U.S. GDP—means that declining consumer confidence could thwart the economic expansion that has now been underway for a couple of years.
- A question many might be asking: Is inflation’s rapid pace nearing an end? It is difficult to say whether it is. However, looking inside the compilation of inflation, one could see that capital goods (comprise 20-25% of the inflation basket) typically do not inflate on a year-over-year basis. Capital goods include technology, apparel, sporting goods, and furnishing. In fact, the prices on appliances, televisions, and information technology components actually decline on a month-over-month basis.
Furthermore, the shift in consumer spending, from certain goods to services such as travel, leisure, entertainment, and restaurants, is going to mean less pricing power in the capital goods category. Therefore, we could actually see deflation on a broader basis, which would provide some relief for the headline Consumer Price Index (CPI) inflation number.
We are not saying inflation is going to dissipate completely, as it could remain elevated for some time. However, we do expect it to subside from the 40-year peaks we have seen recently.
Although we expect stock prices to eventually regain positive momentum before year’s end, it could be volatile and challenging for the next few months. This should not deter investors and their long-term investment plans related to owning stocks and bonds (which have also struggled due to higher interest rates). Volatility is a normal condition and history shows investors are rewarded for staying the course.
Please contact your Janney Financial Advisor if you have concerns about market volatility.
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