September 2022 Newsletter: Inflation

The stock market has been down since it reached a high around late December 2021. Although it’s recovered from the steepest drop the S&P 500 is still down around 16% and the NASDAQ down 25% over the past nine months.

The biggest question I get from clients (and friends and family too) is when will the market recover? I think at this point it’s clear that the markets two biggest concerns are inflation and the Federal Reserve raising interest rates too high. When these concerns appear to be resolved the market should rebound substantially. After months of writing relatively the same newsletter I think we are finally at the point where we are starting to see inflation not just stop rising but also start to fall.

The chart below shows CPI (a measure of inflation) from prior to COVID up until one month ago (the latest data available). Last month we saw inflation finally stop growing and basically stay flat.

Looking at the data for two items that make up a large chunk of the inflation index, gas/oil prices and auto prices shows some good news.

Oil and by extension gas prices have continued to trend down from their peaks a few months ago.

Both gas and oil prices are not down yet to their pre-COVID levels but both are back near or below their circa 2013-2014 levels.

Used car prices are continuing to decline from their stratospheric levels with several consecutive monthly drops.

At a minimum the declines in both gas and used car prices mean we will have at least a .75 point decline in CPI and raises the probability of actually recording a sizeable negative CPI print and our first substantial data point that inflation is starting to head down.

We are also starting to see signs of inflation easing in other areas. The Case-Shiller Home Price index recorded a very slight month over month price decline.

That should help the Federal Reserve feel less pressure to raise interest rates. Right now, rates are at 2.5% or right around where they were pre-COVID.

As long as the Fed ends rate hikes with rates somewhere at or below 5% (around what one might consider normal historically) we shouldn’t see a big enough drag on the economy. Job growth is still robust and consumer balance sheets are in good shape. As long as inflation cools and the Fed rate hikes begin to scale back or stop the market should begin to recovery as we reach the end of 2022 and into the beginning of 2023.