The S&P 500 fell nearly 2% from Monday through Friday this past week, and in the process, it posted its worst weekly performance since late October 2023. The retreat was primarily due to yet another hotter than anticipated consumer price index (CPI) report published on Wednesday which revealed that inflation rose to 3.5%. Investors reacted to the CPI data by dialing back their Federal Reserve rate cut expectations and all but shutting the door on a 25 basis point cut in June. Also grabbing headlines this week were geopolitical tensions in the Middle East and the start of the first quarter earnings season at home.

If US inflation remains sticky, the Federal Reserve might do more than simply push back rate cuts. The inflation reading also brought into discussion the possibility of another rate hike. Robust consumption and investment as well as easing supply chain problems have fueled strong US growth despite higher interest rates. Another month of higher CPI could all but guarantee another rate hike.

Wall Street has not taken kindly to the possibility of a rate hike when the market was expecting as much as six rate cuts just earlier this year.

Future Wealth’s View

It increasingly appears that with each successive number adding to the picture being assessed by the data dependent Federal Reserve, the inflation fight has become more challenging due to sticky inflation.  With economic growth strong at the moment, the Fed doesn’t feel intense pressure to cut rates. From their viewpoint, a cut in interest rates when inflation is rising is simply unwise. And so, we are back to waiting for inflation to come down from current levels to their 2% target, before an interest rate cut will come to fruition.

In a book titled the “Ritual Effect” written by Michael Norton, he points out the difference between a “ritual” and “habit”. Habit pertains to what we do while the ritual refers to how we do it. It is an important distinction. Investors may be in the “habit” of looking at their portfolios’  value on a regular basis but are they engaging in the “ritual” of analyzing and researching their investments when circumstances change in economic data, quarterly earnings and political risks?

This is where good financial advisors earn their keep.