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Stock and Bond Market Fall Sharply Due to Inflation Thumbnail

Stock and Bond Market Fall Sharply Due to Inflation

Sorry, but not much good news to report today.  As for last week, each of the major stock market indices fell sharply, with the Dow (-4.6%), NASDAQ (-5.6%), and S&P 500 (-5.0%).  Taxable and tax free municipal bonds also fell about 1.5% for the week.  For those who are looking, that trend is continuing into today with markets getting pummeled again.  While we experienced a nice market rally of almost 6% in the final week of May, we have given all that back, with the worst 2-week stretch since March 2020 at the onset of the pandemic.

It’s that dirty 9-letter word we’ve been repeating for months – inflation.  Just when we thought that inflation was showing signs of improvement (it had gone down in April and was expected to go down again in May), it surprised everyone by increasing to 8.6%, the highest inflation rate in over 40 years.  That inflation rate was reported on Friday morning, which caused the markets to drop precipitously and it is carrying into today as well.  The Fed meets this week, and it was widely anticipated that they would raise interest rates by 0.5%, but now it’s about even odds that they raise rates by 0.75%, and that is creating even more havoc with the markets.  We may see a relief rally on Wednesday afternoon if they raise rates by “only” 0.5%.  

Consumer sentiment also hit an all-time low since the University of Michigan has been reporting this data since the 1970’s.  After all, this is driven mostly by gas prices, as those prices are essentially being advertised by every gas station you drive by.  Human nature and the markets don’t like uncertainty, and the uncertainty also tends to generate more negative thoughts than positive ones.  The only bright side is that whenever consumer sentiment has hit a low, the markets came roaring back with extraordinary gains.

In regard to our portfolios, our investment committee has decided to pare back on risk.  While we hate selling into a down market, we also consider it somewhat of a hedge as well.  After all, if the stock and bond markets go up and we miss some of the rally, at least the rest of the portfolio went up, right?  We recently heard a client say, “Flat is the new up!”.  How ironic, but true at this moment.  In short, we intend to pare back about 10% - 15% on stocks, reduce our duration (maturity length) on bonds to lower risk, and also purchase a small amount of commodities that also do well during inflationary environments.

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