Stocks are falling for the third-straight day this week after the highly awaited consumer price index report showed a staggering rise in prices last month, but while inflation still poses a big risk to the market, some experts believe prices should normalize now that the effects of stimulus checks have largely subsided.
By 10:35 a.m. EDT, the Dow Jones Industrial Average had slipped 279 points, or 0.8%, to 33,990, while the S&P 500 dipped 0.7% and the tech-heavy Nasdaq, which has been underperforming this year, fell 1.4%.
Feeding the ongoing market uncertainty, the Bureau of Labor Statistics reported Wednesday that consumer prices jumped 4.2% year over year in April, marking the highest increase in nearly 13 years as investors worry over problematic inflation sparked by unprecedented government spending during the pandemic.
After staying roughly flat Tuesday, big-tech stocks are taking the brunt of the hit Wednesday, with Dow components Apple, Microsoft and Intel each falling nearly 2% on fears that the Federal Reserve may raise interest rates—which experts agree would hurt tech stocks the most.
Financial stocks, on the other hand, are leading the index’s gains: JPMorgan and Goldman Sachs are up 1.2% and 1%, respectively, in a sign investors could be expecting interest rates to rise more quickly than expected since banks benefit from the income boost to lending.
Though she called the report “surprisingly strong,” economist Cailin Birch at The Economist Intelligence Unit said she doesn’t expect to see a similar increase in the coming months “as the one-time effect of the March stimulus checks wears off,” adding that the checks likely lifted demand for used cars, which accounted for more than one-third of the overall price increase.
“Clearly, the near-term spike will be short-lived because it is being compared against artificially low numbers from the depths of the pandemic,” Chris Zaccarelli, the chief investment officer for Independent Advisor Alliance, said of the Wednesday report, referring to so-called base effects that make growth seem sharper when it’s compared against a lower figure.
“The U.S. CPI figures for April are huge,” Vital Knowledge Media Founder Adam Crisafulli said in a Wednesday morning note. He expects stocks will see a “knee-jerk move” down before recovering by the end of the day. “Despite being very hot, the number really shouldn’t change anyone’s view… A few one-offs (like used autos) are accounting for a lot of the inflation firming, [and] investors are already expecting price increases to occur—the debate is whether they are still gallivanting higher in the fourth quarter.”
Due to the recent market weakness, the Dow and S&P are now down nearly 2% and 3%, respectively, from their highs earlier this month. The Nasdaq, meanwhile, has tumbled nearly 7% from a late-April peak.
“The question isn’t whether inflation returns or not—that is almost assured in the U.S.—but whether the Fed will act in time to keep it contained. If they time everything perfectly—and we would suggest that even they realize how difficult that would be to do—then inflation won’t rise far above 2%,” Zaccarelli said Wednesday. “But otherwise we are headed higher than that, and ultimately the Fed will need to tighten monetary policy, which is what will likely cause the next recession and end this bull market.”
What To Watch For
Some experts, including Crisafulli, think the Fed may signal at its next Federal Open Market Committee meeting in June that it will look to start raising rates by the end of this year.
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