Why the market downturn has investors concerned about an inflation surge
Anyone who has been actively investing long enough knows that the market moves up and down. It is the natural order of things. However, when the market has been steadily rising and experiences a sudden downturn, many investors grow concerned. Is it a sign of a reversal? Is it the symptom of something bigger?
In the case of the recent market downturn in early May 2021, investors are concerned that inflation will rise, which in turn will lead to rising interest rates.
Here is what all of this could mean for you.
Why are investors concerned about the market downturn and inflation?
The cause of the dip is traceable to a few different causes, one being a recent report on job growth coming in below expectations. As the nation recovers from the COVID-19 pandemic, jobs are not growing as quickly as experts predicted, which in turn, has an impact on the market.
Another concern is the sudden unexpected spike in the inflation rate. The U.S. Department of Labor evaluated consumer prices in April 2021 and concluded that the month-to-month gain in the cost of goods and services has risen 0.8% over March prices. This was well above the predicted 0.2% increase, which caused many investors to worry about a looming increase of interest rates to counteract the inflation. This would raise bond rates, which would make bonds more valuable for many investors than stocks, causing investors to sell off stocks to buy bonds instead.
Should you be concerned?
A harder look at the numbers shows that much of the price increase came in the energy sector, which is notoriously volatile. Energy prices jumped 25% from this point in the previous year. The producer price index, which measures inflation rate for companies and manufacturers, has risen 6.2% for 12 months ending in April, which is also higher than predictions. However, supply chain disruptions caused by tight border restrictions due to COVID-19 and a ripple effect caused by the Suez Canal blockage have contributed greatly to this hike.
Additionally, the U.S. economy is still in recovery mode from the pandemic, which distorts year-over-year comparisons that have traditionally been insightful.
So, what does this mean for you? Well, the value of stocks could go down a bit further — the emotional impacts of these selloffs have a way of feeding on themselves. However, the market may still have its best days ahead. The economy is close to getting back on its feet and the majority of people are vaccinated, which could drive growth.
If you are concerned about your investments or your financial plan, you should consult a financial professional who can help you stay on course for reaching your goals.
Talk to a ProVise CFP® professional about investing during the market downturn
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