War on Inflation | May 12, 2023

Rising grocery prices and surging cost of supermarket groceries as an inflation financial crisis concept and the rise of food costs with an arrow as a composite image.
AUTHOR: Jason Roque, CFP®, APMA®, AWMA®
TITLE:   Investment Adviser Rep – CCO
TAGS:   S&P 500, NASDAQ, Debt Ceiling, Inflation, Banks

The war on inflation took a little noticed hit last week. What does it mean for markets?

Monday                                      S&P 500 0.05% | NASDAQ 0.17%

The week started in a muted fashion. The docket for the week is rather packed–debt ceiling talks, Consumer inflation data, and Consumer Sentiment.

Tuesday                               S&P 500 0.46% | NASDAQ 0.63%

The debt ceiling stole the show on Tuesday as both sides were to meet for talks on the matter. There is very little joint session time in the month of May for a resolution to be codified. Unfortunately, the lack of resolution continues to breed short-term volatility.

Wednesday                         S&P 500 0.45% | NASDAQ 1.04%

Inflation data out Wednesday showed that it continues to cool however, this time at a much more moderate pace. Larger changes are expected for the May and June inflation reports, which should yield investor confidence. Higher interest rates applied pressure on the struggling financials sector, which kept the S&P from advancing as the NASDAQ did.

Thursday                             S&P 500 0.17% | NASDAQ 0.18%

Markets were moved on Thursday by lower than expected subscriber growth numbers for Disney. Additionally, PacWest, a troubled regional bank, announced that it lost 9.5% of its deposit base just last week. This caused further pain in the regional bank market.

Friday                                           S&P 500 -0.16% | NASDAQ -0.36%

Market movement on Friday started optimistic, but quickly turned to red as consumer sentiment data was released. Preliminary data shows that sentiment fell to 57.7, the lowest level since November. Materially more important was that consumer expectations for inflation five years down the road rose above 3%. The Federal Reserve Boards (FRB) job is now tougher as the perceived need to fight inflation could last longer.

Conclusion                           S&P 500 -0.14% | NASDAQ -0.40%

Why did inflation expectations move the market on Friday? Inflation expectations can drive consumer behavior; It could create a rush of buying that leads to more inflation. When consumers feel prices will be rising, they feel the need to make purchases now to avoid higher prices. This creates increased demand for goods, which ultimately drives prices up, creating inflation, essentially becoming a self-fulfilling prophecy. If the FRB needs to continue to raise rates or sustain rates at a higher level, it could spell prolonged volatility.

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