There seems to be a growing unease in the financial markets. U.S. stock indexes hit a fresh 52-week low on Friday. The S&P 500 is down 22.3% year-to-date and is at December 2020 levels. Meanwhile, key U.S. Treasury interest rates rose to their highest levels since 2018.
Although inadequate to discuss only one cause for market action, the root seems to be high inflation’s dampening effect on the economy. Some analysts believe the Federal Reserve (Fed) will be unsuccessful in their “soft landing” objective of taming inflation by raising interest rates without causing a recession. The Fed’s playbook is classic: raise interest rates to slow demand and thus inflation.
However, the Fed can only do so much through monetary policy, which is their realm. Unfortunately, they can’t increase economic supply or affect fiscal policy. This bout of inflation seems to be mostly supply-driven, not demand-driven. Stagflation (high inflation coupled with sluggish growth) could be the outcome.
The economy around us may be going nuts. We can’t control that, but we can control how we respond. As individual investors, I believe we should turn inwards, as it were, to stay focused on our personal financial plans and investment objectives.