On Friday, the core personal consumption expenditures index (PCE), the preferred inflation gauge of the Federal Reserve, rose 0.4% on the month, hotter than the 0.3% estimate, with an annual increase of 2.8%, above the 2.7% estimate. This follows on the heels of Chairman Jerome Powell‘s comment last week that tariff induced inflation will be “transitory”.
Wall Street is beginning to question that assumption that there would just be a one time increase in price levels, which could be overlooked. Setting policy is likely to become trickier for the central bank as it projects a higher unemployment rate of 4.4% and a 1.7% change in its real GDP during 2025. The risk is that if inflation remains sticky or creeps back up to 3%, the Fed will be in a bind to make a compelling case to lower interest rates which could spike inflation even further. For the week, the S&P retreated 1.5%, while the Nasdaq slid 2.6%. The Dow fell 1.0%.
On April 2, a day that Donald Trump has dubbed “Liberation Day”, reciprocal tariffs will go into effect along with a 25% tariff on auto imports announced earlier this week. The markets don’t like uncertainty and it appears that uncertainty is all we have for now.
Future Wealth’s View
The joke is that “God created economists to make the weatherman look better”. Economists are now battling uncertainty about uncertainty and this brings back memories of Donald Rumsfeld’s famous quote – “There are known unknowns and unknown unknowns”.
Just last week, we had stated that stagflation remains a big risk for the Fed. Economic data appears to now show that we may already be in a stagflation period. But, the Fed’s hands are mostly tied. If inflation remains sticky, we believe the Fed will have no choice but to leave interest rates unchanged until unemployment creeps up higher from current levels.
With the markets in correction territory and the outlook not looking positive, it is easy to take a road of least resistance and flee the market. But, it is important to keep in mind that after two years of 25%+ returns in the S&P 500, a correction of 10% should not be the reason to dump all the stocks. The longer term return of the S&P 500 over the past 50 years is ~10% per year. While it is true that March 2025 marked the worst month for the Nasdaq and S&P 500 since Nov 2022, investing in the stock market was not meant for the faint of heart.
In Greek Mythology, there is the story of Sisyphus, who was deemed by the gods to push a boulder up the hill, only to watch it roll down again and again. Investing in the market, in some ways, is akin to the mythical boulder. In the end, instead of blaming a million other things for the boulder (or our investments) rolling down again, it is better to take ownership of the boulder (or the investments). But, caution is warranted in not randomly buying or selling stocks. This is the time when fundamental research and sound portfolio analysis separates the men from the boys.