Weekly Market Update 5/23/2022

April’s pricing data did little to assuage concerns about inflation. Both the Consumer and Producer Price Indexes came in above expectations, with respective 12-month advances of 8.3% and 11.0%. The metrics showed significant increases in food, energy, and rental apartment prices. 

The continued uncertainty of whether inflation has peaked roiled the financial markets. The source of the volatility is that high inflation adds to sentiment that the Federal Reserve will need to act aggressively on the monetary policy tightening front. The expectation, consistent with the latest comments by the Fed’s Chairman, Jerome Powell, is that the June and July Federal Open Market Committee meetings will bring half-percentage-point hikes to the benchmark short-term interest rate; yet Mr. Powell indicated this isn’t a certainty. The central bank also will begin scheduled sales of bonds, which remove liquidity (or cash) from the financial system, next month. 

The Fed hopes that by slowing demand it will alleviate some of the pricing pressure. However, with the supply side of the equation still fractured by the ill effects of the COVID-19 pandemic and the war in Eastern Europe, reducing demand may not be enough to rein in inflation. The Fed’s Chairman was recently optimistic that employment could remain strong even as measures to control inflation cause “some pain.” 

The higher prices may be starting to wear on the consumer. The preliminary May reading on consumer sentiment from the University of Michigan fell to its lowest level in more than a decade and showed buying plans for durable goods like home appliances are at a record low due to higher prices. Given that the consumer accounts for roughly two-thirds of the nation’s gross domestic product, this will make the Fed’s task of stabilizing prices without creating other problems even tougher. 

The inflation worries—and resultant higher borrowing costs—prompted a movement out of riskier assets and into more-defensive holdings. On point, the U.S. Dollar Index, which measures the strength of the dollar against a basket of international currencies, recently hit a 20-year high. 

Conclusion: In this volatile market, where swings in trading have at times been pronounced, we recommend that investors maintain a well-diversified portfolio of high-quality companies, while also keeping a healthy percentage of cash on hand. 

Source: ValueLine.com