The good news is that inflation in April fell to 8.3% from 8.5% in March. The bad news is that it still stayed above 8%. The task at hand, for the Fed, is to bring inflation down to its 2% target without pushing the economy into a recession. It gives us no comfort when we look back on data that shows only twice has inflation risen as fast as it has in the past year – Korean War in 1951 and Arab Oil Embargo in 1973. In both cases, inflation came back down to previous levels only after 12 to 24 months.
But there are positive signs that suggest that inflation may be dropping further from current levels in the coming months – consumers are reluctant to spend as much, suppliers are easing up in price increases and quit rates at companies are falling even as unemployment continues to remain low
Investors can do well in this market but it requires discipline, patience and courage.
Future Wealth’s View
The one class in grad school at Stanford that changed my view of the world was understanding the difference between decision and outcome – you can make a good decision and have a bad outcome but a bad decision rarely ever produces a good outcome. And a good decision is based not on a hunch or a random advice or the emotional state of mind but from rigorous analysis of all the information that is available at that time.
That brings us to what will happen to the stock market until inflation comes down to Fed’s target level of 2%. Expect high volatility – we will have massive up days and treacherous down days. But it is important to resist investing because of FOMO (Fear of Missing Out) in a company just because it is down 70% from its high and neither is it wise to avoid a company that is trading at 1x its book value. The key is to focus on fundamentals of the investments – cash flow, valuation and earnings.
Our analysis suggests that May’s inflation number to be released next month will be lower than the one in April. If it drops below 8%, Wall Street will celebrate. Else, it may be wise to turn off your computer and limit your screen time.