Inflation Hits Home
The stock market continued its wild ride during April as investors continued to weigh the inflation numbers and rising interest rates that threaten to derail the economy. The S&P 500 index dropped 8.8% for the month of April and is down 13.3% year to date through the end of April. The Nasdaq index dropped 13.3% for the month and is down 22.1% year to date. The bond market was down as well, dropping 3.8% for the month of April and 9.5% year to date.
Investors have raised the odds of a recession based on statements last week from Federal Reserve Chair Jerome Powell, who declared “getting inflation back to the 2% goal” is a key policy imperative right now. Powell added that “it is appropriate, in my view, to be moving a little more quickly” at raising interest rates. Higher interest rates slow the economy by discouraging investment and consumption spending, thus putting downward pressure on prices. However, lower investment and spending levels also increase the probability that the economy will slow too much and result in a recession.
Investors were also spooked by inflation data released Friday that showed the PCE price index, the Federal Reserve’s preferred inflation measure, increased 6.6% month over month in March, the highest level since 1982. The Bureau of Economic Analysis ("BEA”) said that energy prices rose 33.9% while food prices rose 9.2%. This new data reinforces Powell’s inflation position and may result in aggressive action by the Federal Reserve.
Despite the inflation picture, the economy’s leading economic indicators remain strong. Building permits rose in March and initial unemployment claims have been below 200,000 for 10 of the past 11 weeks, signaling healthy housing and jobs markets. Consumer expectations have ticked down, but spending remains at record levels. The recession risk exists if consumers reduce their spending despite the strong labor market.
It is time for investors to focus on high quality investments: strong companies that have solid balance sheets, showing that they can weather a recession if it does come. For long-term investors the current decline could represent an opportunity as fear spikes. No matter what comes, it is wise to stay focused on strategic goals rather than short term market movements.