Inflation worries send markets into worst decline since January

Ed Mertiri |

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Markets Remain Fearful of Inflation

Bloomberg TV

Friday’s May 2022 Consumer Price Index report produced a four-decade high for U.S. inflation (just slightly beating the record previously set in March) at 8.6% year over year. The report was troubling on multiple fronts. May’s CPI was higher than what many analysts were expecting and reported higher prices in all categories included in the index, from energy to apparel to services. It is unusual for the report to include across- the- board monthly increases. Many had hoped that the small decrease in April’s CPI was the first sign of price stabilization before the May CPI report dashed those hopes, sending markets tumbling.

The S&P 500 dropped 5% for its worst weekly return since January. All S&P 500 sectors and factors styles closed the week lower. Much like the inflation report, there were no safe havens. The broad decline started on Thursday after hawkish comments from the European Central Bank. Friday’s action was an extreme end to the week.

There were calls for the Federal Reserve to increase its pace of rate increases. Some investors would like the Federal Reserve to increase the overnight rate by more than the indicated 50 basis point (half a percent) move at the meeting this Wednesday. However, we expect Chairman Powell to remain on the Fed’s stated incremental increase path, versus a shake and shock type of move. This could mean consumers can expect to see extreme inflation for months to come.

We can expect markets to remain volatile this week as markets tend to have strong reactions, both positive and negative, to Federal Reserve Chairman Powell’s comments.

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