Believe me, everyone on Wall Street wants inflation to go away, or at least shrink back to below 2%, a level we enjoyed not so long ago.
The Consumer Price Index report, released on September 13th, showed it might be some time before we see 2% again. Consumer prices ticked slightly lower in August, but not as much as what Wall Street wanted. Economists, pointing out that gasoline prices dropped in the past month, made bold predictions for August inflation. Too bold, as it turned out.
Stocks got clobbered, and bonds didn’t fare much better. The inflation report showed that higher food, shelter, and medical services costs were to blame. Higher costs in those areas indicate inflation could be more persistent and entrenched than we thought.1
After the August CPI release, the Fed doubled down on its hawkish rate hike language with Chairman Powell stating that Fed would not stop until the 'job was done' on lowering inflation. This week they lifted the key rate by another .75%. While that hike was expected for the last few weeks, the Fed's short term rate target increased towards 4% by the end of 2022. This unexpected news sent equity markets lower.
In the chart below, the green highlights show the most likely outcomes for the next several Fed meetings, according to the CME Group. (Notice that this weeks release was accurately predicted) Keep in mind that in early September, the CME Group’s indicator said smaller increases were possible. But no more.
All too often this year, there has not been great news to pass along about the markets. But I want to assure you that our team is committed to staying on top of the news in good times, bad times, and in-between times. The silver lining through all of this market volatility is that the S&P 500 current and forward valuations are coming into 5 year lows. Historically, periods of suppressed valuations were opportunities for long term investors. We encourage you to remain focused on the long-term and believe that eventually the market will revert towards more stable and normal conditions.
Thanks for your trust and if you have specific questions about these data points, please give our office a call.
1. BLS.gov, September 13, 2022
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