Inflation a Concern for Investors and Stock Market

Inflation continues to rise slowly.  This continues to be a worry for the Federal Reserve.  The PCE (Personal Consumption Expenditures) is the Fed’s preferred inflation measure.  In April, it increased 3.8%.  That’s it’s highest level in a year.  Core inflation, which excludes energy and food prices, climbed 3.3%.  Both numbers are higher than the Fed’s 2% target which makes it less likely for the Fed to cut interest rates moving forward.

Energy prices, strong consumer spending, steady wage growth and continued investment in AI technology are the primary catalysts for the increase in inflation.  Kevin Warsh, the new Fed chairmen, has previously argued that the central bank was too slow to fight inflation after the pandemic. 

Because of this perspective, many investors believe he will remain focused on bringing inflation down, even if it means keeping rates higher for longer or even raising them again. 

For investors, this increases uncertainty about the future.  Investors have been expecting rate cuts, but the latest inflation data has forced investors to rethink those assumptions.  If the Fed signals that rates could stay elevated, or even move higher, stocks may face increased volatile and choppy trading throughout the rest of the year.  Higher interest rates can slow economic growth and reduce the appeal of riskier assets, making it more difficult for stocks to maintain a steady upward trend. 

Predicting what’s going to happen next in the Middle East is impossible.  The situation and key actors are unpredictable.  This is troubling for consumers and investors who are fatigued by high energy prices. 

We always try to remember that, all geopolitical disruptions eventual pass.  This one will be no different.  Stocks and bonds have done surprisingly well in spite of the disruptions in the oil markets.  Also, investors continue to invest in all things related to AI and don’t seem to be abating.  Also, the consumer continues to spend. 

Recently, we have been reminded that the war in Iran is still affecting the markets.  However, profit taking in the semiconductor space is to be expected.  Even after the significant sell off since last Friday, Ishar Semiconductor ETF is still up more than 80% year-to-date. 

Despite recent volatility, large investment banks (the best guessers) continue to predict the US stock market to be higher (some significantly higher at 10% of more) by the end of this year.  This means current volatility is a buying opportunity.