August CPI Data - Why the Sell-Off?
The August CPI data was announced today at 0.1% increase from July, and the market sold off with the S&P 500 down 4.3% and the Dow Jones Industrial Average down 1,276 points (3.9%).
Why would a small 0.1% increase in CPI cause such a big sell-off in the markets?
The answer: because analysts were expecting a 0.1% decline for August instead of an increase (albeit a small one at that). An increase of 0.1% indicates that inflation remains high from a year-over-year perspective (at 8.3%) and may not be moderating as hoped.
Still, today’s market reaction appears excessive and is a good reminder of the tendency for markets to overreact, both positively and negatively. Investors should keep that in mind and not fall under the persuasive idea that market swings reflect an accurate assessment of the underlying situation.
What is that underlying situation?
Indeed, inflation is increasing due to a number of factors (Ukraine/Russia conflict, robust COVID stimulus programs, strained supply chain, etc.), and the Fed is aggressively raising interest rates in an attempt to dampen inflation by slowing economic growth. The Fed must do this without causing a recession, and watching/anticipating them perform this delicate task is leading to excessive market volatility.
Will the Fed tame inflation at some point?
Yes. Should investors fear a recession? While experiencing a recession may be unpleasant and even scary, recessions are a normal part of a business cycle, and they tend to repeat every 5-7 years. The key is to ensure your money is properly allocated to manage through a recessionary period. Again, stepping back and looking at the bigger picture, recoveries and expansions follow recessions, and the securities market will move accordingly. Perhaps a recession is around the corner, or perhaps not, but either way, keep your eye on the big picture.
Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm with offices in Santa Monica and San Diego, CA serving clients throughout Southern California and the United States.
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