Inflation’s impact on the stock market
Stocks can generally act as a buffer against the long-term impacts of inflation.
October’s consumer inflation report came in lower than forecasted. Equity markets responded positively to expectations of smaller Fed rate hikes ahead with the S&P 500 jumping by 5.5 percent last Thursday. But inflation remains highly elevated and one month of cooler prices does not make a trend. Elsewhere, survey results indicate that optimism is very low for small business owners and consumers alike.
Due to weakening global demand and improving supply chains, core goods inflation fell in October to an 18-month low.
The net percent of small businesses raising average selling prices has fallen significantly in recent months but, at 50 percent, suggests inflationary pressures are still widespread.
Overall retail sales are expected to be boosted by strong auto sales in October — unit sales jumped to an annualized pace of 14.9 million. However, momentum for core consumer spending is slowing heading into the holiday shopping season as elevated inflation and high interest rates pinch consumers’ wallets. Core retail sales, which stagnated over the summer, were likely weaker again in October.
Manufacturing activity looks to be grinding slower as domestic and global demand for goods cools. Factories’ capacity utilization rates though remain high, adding upward pressure to inflation despite falling input costs. Industrial production should be slightly positive in October, weighed down by cuts in manufacturing output.
Residential housing activity continues to be hit hard by mortgage rates that have jumped to around 7.0 percent. Construction declines are led by a sharp retrenchment in single-family activity, while multifamily starts are holding up better. For October, we expect further contraction in total starts and permits.