Stocks fell every day this week from Tuesday through Friday and the S&P 500 finished its worst week since February, after St. Louis Federal Reserve President James Bullard said interest rates may need to rise next year to tamp down possible inflation. His comments came after the Fed on Wednesday added two rate hikes to its 2023 forecast and increased its inflation projection for the year, pressuring stock prices. The news led to a 3.5% loss for the week on the Dow Jones average, while the S&P fell 1.9% and the Nasdaq edged 0.3% lower.

While most have come to the understanding that inflation is here to stay, the bigger question that investors are asking and the Fed is attempting to address is about the rate of inflation. If it comes to pass that the rate of inflation — the annual growth of consumer prices in aggregate — is still likely to decline, then the Fed is unlikely to move aggressively in raising rates.

But, of course, it can be difficult to remain confident in this view in the face of so many voices in the financial media warning about a return of inflation or even hyperinflation.

Future Wealth’s View

We have addressed this topic of inflation as being largely benign in several reports over the past year and yet, the market cannot seem to shake the fear of inflation from adversely affecting stock prices. The primary reason for this sensitivity to comments from the Fed is that no one really knows how the post pandemic world will turn out. There are some who speculate that there will be a percentage of the population who will never go back to the office, a segment that will continue to order in food for delivery or pick up,  a portion who will always wear masks, a sliver of the population who will not seek employment ever again etc. 

 A common tendency when it comes to investing is to think that current trends can continue indefinitely. While these theories stated above are being thrown around with little analysis or foresight, the fact remains that it will take a year or two to get back to normalcy i.e. life as we knew it.  In the meantime, wild speculation of runaway inflation and/or extreme valuations are best ignored by investors.

Benjamin Graham’s famous book – The Intelligent Investor, a must read for anyone investing in the stock market, has the most sensible quote – “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”