Zacks Investment Management

James H. from Portland, ME asks: Hi Mitch, I’m sure I’m like a lot of your other readers expressing concern about spiraling inflation and the market’s pretty relentless selloff. What comments do you have about the latest inflation reading and the accompanying downdraft?

Mitch’s Response:

Thanks for writing! I understand how unpleasant it is to experience such pronounced selling pressure in the stock market, while also watching negative headline after negative headline appear on the news. It often feels like a perfect storm when both are happening at the same time.

The latest inflation data caused a stir last week – the Labor Department reported that the consumer price index (CPI) rose 8.6% year-over-year in May, its fastest rate of increase since December 1981. A lion’s share of the price increases came predictably from energy, which saw prices rise 34.6% from a year earlier. Monitoring the changes in gas prices over the course of May made this element of inflation very visible.

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Grocery prices also saw their biggest increase since 1979, as exports have been disrupted due to the war and other supply chain issues still related to the pandemic. The impact of drought and disease on certain crops and meats has also factored into higher prices. Elsewhere, airfares were up 12.6% for the month as the cost of jet fuel continues to rise, hotel prices surged 19.3%, and restaurant prices were up 7.4%.

When this type of data is accompanied by sharp selling pressure in the stock market, it can easily feel like everything is in a tailspin. And since folks interact daily with higher food and energy prices, it is also very easy to leap into thinking the broad economy is in freefall.  

But as it stands today, the economy is not in freefall, and inflation is only one data point of many that matter to the U.S. and the world’s growth trajectory. I would also argue that the selling pressure in the stock market is less related to inflation figures – which are already widely known and priced into the market – and more related to sentiment-driven forces.

A recent poll found that 83% of people think the U.S. economy is in a poor or ‘not so good’ state, and 35% of respondents reported being unhappy with their financial situation. These figures mean that people are more unhappy today than they were in the midst and aftermath of the 2008 Global Financial Crisis, when the jobless rate was double-digits, major financial institutions were declaring bankruptcy, and millions of people were losing their homes and livelihoods. Is the economy worse today than it was then?

History tells us over and over that the more negative investor psychology becomes, the greater the opportunity for strong returns on a forward-looking basis. This principle is especially true, in my view, when the economic narrative is fixated on an issue that is widely known – in this case, inflation – even as jobs remain plentiful, and consumers continue to spend ‘behind the scenes.’ I understand that market volatility is challenging, unpleasant, and can easily elicit doubt even among the most experienced investors. But now is a time to stay cool.  

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• How to build or modify your asset allocation to outperform inflation
• The importance of analyzing your spending by category
• Strategies to maximize Social Security retirement benefits
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If you have $500,000 or more to invest, get our free guide today!

Disclosure