Inflation’s impact on the stock market
Stocks can generally act as a buffer against the long-term impacts of inflation.
The U.S. economy is in the late cycle period with the Fed responding to rapid inflation with a sharp tightening of monetary policy to slow domestic demand. Key leading indicators (including the yield curve) point to elevated recession risks over 2023, especially with the Fed projected to raise rates further at coming meetings.
Job growth was stunningly strong in January and the unemployment rate fell to its lowest level since 1969. While great news under normal circumstances, it can keep services inflation elevated for longer and increases the odds of tighter monetary policy and a recession emerging sometime in the second half. (pg. 2)
Optimism greeted 2023 with cooler inflation readings boosting investors’ appetite for risky assets. Long treasuries erased some of last year’s plunge, while equity markets posted broad-based increases. Recent central bank actions and the surprisingly strong January employment report suggest a prolonged period of restrictive policy that took some steam out of the equity market at the start of February. (pg. 3)
The mixed economic readings at the outset of the year reflects the Covid-related crosscurrents that continue to impact the outlook. It is also likely a symptom of an economy in transition, as the numbers often diverge when the growth rate is either ramping up or winding down. In this case, the enduring strength in the labor market is offsetting weakness elsewhere as is typical in the early stages of rate hike cycles. Over time, however, the lagged effects of Fed tightening will…(see the full report for more, pg. 4)