Inflation is proving to be far more tenacious than markets had hoped.
The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981.
The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine has a significant influence on food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported:
“The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy [natural gas, coal, crude oil], fertilizers, and some grains [wheat, barley, and corn].”
With inflation rising, the Federal Reserve will continue to aggressively raise the federal funds rate. There is a 50-50 chance the Fed will raise rates by 0.75 percent in July (rather than 0.50 percent), and some economists say there could be a 0.75% hike this week when the Fed meets, reported Scott Lanman and Kristin Aquino of Bloomberg.
The inflation news unsettled already volatile stock and bond markets. Major U.S. stock indices declined last week as investors reassessed the potential impact of higher interest rates and inflation on company earnings and share prices, reported Randall W. Forsyth of Barron’s. The Treasury yield curve flattened a bit as the yield on two-year Treasuries rose to a multi-year high, reported Jacob Sonenshine and Jack Denton of Barron’s. The benchmark 10-year Treasury Note finished the week yielding more than 3 percent.
There was a hint of good news in the report. The core CPI, which excludes food and energy prices because they are volatile and can distort pricing trends, is trending lower. It dropped from 6.5 percent in March to 6.2 percent in April and 6.0 percent in May.
The Federal Reserve’s favored inflation gauge is the Personal Consumption Price (PCE) Index, which will be released on June 30.
A bear market occurs when stocks have declined in value by about 20 percent or more. Investing during a bear market can be a lot like playing baseball for a team that’s in a slump. Your teammates are worried, hecklers distract the players’ attention, and the team’s record of wins and losses moves in the wrong direction. You might find yourself beginning to question whether playing baseball is right for you.
Before you decide to exit the game, here are some tips for coping with bear markets:
1. Remember, downturns don’t last forever. The Standard & poor’s 500 Index has experienced 7 bear markets over the last 50 years and recovered from all of them, reported Thomas Franck of CNBC. Here’s a rundown of the duration and returns of bear and bull markets since 1973.
Year Bear market Total return Bull market Total return
1973 21 months -48 percent 74 months +126 percent
1980 20 months -27 percent 60 months +229 percent
1987 3 months -34 percent 31 months + 65 percent
1990 3 months -20 percent 113 months +417 percent
2000 31 months -49 percent 60 months +102 percent
2007 7 months -57 percent 131 months +401 percent
2020 1 month -27 percent TBD TBD
“Bull markets tend to last far longer and generate moves of far greater magnitude than bear markets. Time after time, bear markets have proven to be good buying opportunities for long-term investors,” explained Franck. Remember, past performance does not guarantee future results.
2. Stay diversified. Make sure your portfolio remains well diversified. During bear markets, some segments of the market will outperform while others underperform. A diversified portfolio can provide a cushion. Diversification won’t help you avoid a loss, but it can help minimize it.
3. Talk with us. During market downturns, investors often panic. That causes some to sell investments and incur losses that may be difficult to recover. If you’re tempted to sell, give us a call first. We’ll discuss your concerns, review your portfolio and help you decide on a course of action.
Possibly the most important things you can do during a bear market are to stay calm and resist making any sudden moves.
“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
—Peter Lynch, former portfolio manager
https://openknowledge.worldbank.org/bitstream/handle/10986/37223/CMO-April-2022.pdf [Page 4]
https://www.bloomberg.com/news/articles/2022-06-10/barclays-sees-75-basis-point-fed-hike-next-week-on-price-surge (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/06-13-22_Bloomberg_Barclays%2c%20Traders%20Set%20Sights%20on%20Fed%20Rate%20Hike_4.pdf)
https://www.barrons.com/articles/inflation-is-hot-and-stocks-are-cold-now-the-fed-needs-to-rethink-its-rosy-projections-51654908515 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/06-13-22_Barrons_Inflation%20is%20Hot%20and%20Stocks%20Are%20Cold_5.pdf)