Stocks meandered lower this week deepening losses for all three of the market’s benchmark indexes. The moves came as investors focused on inflation with Treasury yields climbing higher, and back-to-back inflation reports showed prices posting record advances. The main sources of pain during the month were gasoline and food. While some contend the current inflation reading of 8.5% is likely its peak, the path down the mountain can’t come soon enough for many consumers. 

The runaway inflation of the past 12 months is a radical change from the low inflation that dominated the past decade. Many are already fearing slowing economic growth in the quarters ahead as the risk of a potential recession rises in the U.S. But markets are pricing that high inflation and hawkish Fed will be temporary.

What if inflation continues unabated into 2023?

Future Wealth’s View

It’s a perfect storm – Russian invasion, surging oil prices, China locking down, further disruptions to supply chains, wage growth accelerating, unfilled positions. It is just a scrambled mess leading to painfully high inflation. In our article on Dec 12, 2021, we had stated that “the inflation storm will batter American families for at least another six months”. Link to the article is here – 

There is the hope that the swing from tight supply to a goods glut could be rapid and dramatic, alleviating the pressure on prices of goods and in turn bringing down inflation. But, there is also a disturbing trend that we think the markets have not digested – there has been a pickup of services inflation, which will be harder to reverse than the pressures seen in the goods sector (that were largely the result of supply and demand mismatches). 

Given this backdrop, we expect the stock market to be searching for direction which means there will no appreciable move one way or the other. Our strategy for our clients since January has been to rotate out of growth sectors in equities and move into TIPS (Treasury Inflation Protected Securities). While keeping modest exposure to certain sectors equities, we have loaded up on TIPS that are yielding returns at or above inflation. It is not often you have TIPS returns being better than stock market returns. But that is the world we live in now.