Has Inflation Killed the Stock Market?


As inflation continues to skyrocket, the effect is now being felt on the stock market, with some wondering if it has finally hit bottom. The Federal Reserve has announced more interest rate hikes coming. Should you invest?

Inflation taking the bottom out of the market

According to Trading Economics, as of February 2022, inflation in the United States spiked to 7.9%, the highest since January 1982. By the end of this quarter, analysts expect US inflation to reach 8.5%.

Developments in Europe and ongoing supply chain constraints and labor shortages have experts predicting a continuation of elevated inflation.

Of course, the 7.9% inflation is only the overall consumer price index (CPI). However, some sectors are seeing significantly higher inflation. For example, energy inflation is 25.55%, producer price change has climbed 10%, export prices are up 152.70%, import prices are up 141.90%, and food inflation is 7.9%.

Market hits a low mid March

On March 12, the S&P 500 hit a low. However, gains of 5% in the last two weeks are buoying optimism, and the NASDAQ 100 has rallied over 7%.

More Federal Reserve rate hikes

On Monday, March 21, Federal Reserve Chairman Jerome Powell vowed to take tough action on inflation. CNBC reported that Powell said the Fed will continue to hike rates until inflation comes under control. Powell indicated increases could come at each of the remaining six meetings of the Federal Reserve this year.

“We will take the necessary steps to ensure a return to price stability,” Powell said. “In particular, we will do so if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

A basis point is equal to 0.01%.

Last week, the Federal Reserve approved its first interest rate hike in over three years. The Fed approved a 0.25 percentage point rate hike, the first since December 2018, CNBC reported.

Positive signs on the stock market

According to The Street, despite the economic downturn, there are a few positive signs:

-Many corporations are flush with cash and are positioned to endure an economic downturn.

-Many corporations have strong balance sheets. Therefore, corporate buybacks will be a continuing event.

Current negatives of the stock market

The following negatives could impact the stock market:

-The ongoing supply chain problem.

-The recent Federal Reserve rate hike and the announcement that more increases are coming.

-Slowing economic growth and persistent inflation could challenge corporations when it comes to maintaining margins and profitability.

-A decline in globalization means a focus on nationalism, which could mean a decrease in corporate profits due to higher sourcing costs.

-The war in Ukraine could disrupt supply chains, as well as inflation pressures.

-Some experts say the current negatives outweigh the positives in the stock market.