Last Friday we saw inflation jump 8.6% (shelter, gasoline and food being biggest contributors). This was an increase from the prior month and the largest increase since December of 1981. Investors are now questioning if 50 basis point increases from the Federal Reserve is enough to rein in inflation. The Feds meeting this week led to a .75% interest rate increase. As a result, yields have increased on the likelihood that rate hikes may be more aggressive in the coming months. There is also the possibility that the Fed may decide to raise rates in-between regularly scheduled meetings. Higher yields to control inflation will likely slow the economy down as borrowing costs for mortgages, cars, credit cards etc. move higher. This uncertainty in the bond market is flowing into the equity market as stocks fell hard on Friday and look to have another selloff today. The S&P500 is down greater than 20% year to date so we are officially into bear market territory. The silver lining here is that the selloff in stocks has caused valuations to no longer look stretched. The S&P500 is trading very close to its 25 year average price-to-earnings ratio of 16.8x (according to JPMorgan). While a further drop in equities is possible, stretched valuations in stocks is no longer a concern. Investors should expect a volatile summer in the markets as gas prices continue to creep higher and eat into discretionary consumer spending. Consumer discretionary stocks have been the worst sector of the stock market this year, losing almost 30%. Long-term investors should expect to experience this type of volatility as part of a healthy stock market cycle. With the Fed focused on inflation, the bond market will also continue to be volatile for the months ahead until inflation begins to wane. It is important on these days to remember that panic is not an investment strategy and we have experienced these types of economic uncertainties in the past.
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