Why the market downturn has investors concerned about an inflation surge

Written by Eric Ebbert CFP®, MBA

On May 26, 2021

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

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about investing? Contact ProVise today to schedule a complimentary consultation.

You May Also Like…

What are the signs of a looming inflation increase?

What are the signs of a looming inflation increase?

If you want to spook an investor, just say “inflation” around them and see what happens. Seriously, though, inflation is always a concern for investors because a change in the inflation rate can have a drastic impact on the market for better or for worse. How does an...

Why choose a CERTIFIED FINANCIAL PLANNER™ in Tampa?

Why choose a CERTIFIED FINANCIAL PLANNER™ in Tampa?

Most people’s schedules are too busy to make time for financial planning. This is a problem, though, because planning and managing your finances is one of the most important things you can do in your life. With a well-thought plan to reach clearly laid-out goals, you...

What is real estate investment and do I need it?

What is real estate investment and do I need it?

Investors have several options in different sectors in which to invest funds to grow their wealth. One sector that will always be around is real estate. People will always need housing, and there will always be a housing market built around it. As such, investors have...

0 Comments