What Should Investors Focus On Right Now?

Investors are paying attention to how their portfolios are responding to inflation and rising interest rates. However, we believe the U.S. economy continues to show positive growth

by Mark Luschini

This should allow stock prices to eventually stabilize.

The combination of the Federal Reserve’s efforts to slow inflation by raising interest rates and the consumer—whose sentiment has been soured by higher prices at the gas pump, grocery store, and more—has weighed on the market recently. It has even heightened talk of a recession, which we do not foresee for the next 9-12 months but is increasingly a probability for 2023.

Inflation is certainly a major contributor to recent volatility, and investors should consider the following:

  • Rising prices are counterweight for consumers’ ability to continue to spend at the pace they have been able to. The importance of consumer spending on the overall economy—representing some 70% of U.S. GDP—means that declining consumer confidence could thwart the economic expansion that has now been underway for a couple of years.
  • A question many might be asking: Is inflation’s rapid pace nearing an end? It is difficult to say whether it is. However, looking inside the compilation of inflation, one could see that capital goods (comprise 20-25% of the inflation basket) typically do not inflate on a year-over-year basis. Capital goods include technology, apparel, sporting goods, and furnishing. In fact, the prices on appliances, televisions, and information technology components actually decline on a month-over-month basis.

Furthermore, the shift in consumer spending, from certain goods to services such as travel, leisure, entertainment, and restaurants, is going to mean less pricing power in the capital goods category. Therefore, we could actually see deflation on a broader basis, which would provide some relief for the headline Consumer Price Index (CPI) inflation number.

We are not saying inflation is going to dissipate completely, as it could remain elevated for some time. However, we do expect it to subside from the 40-year peaks we have seen recently.

The Takeaway

Although we expect stock prices to eventually regain positive momentum before year’s end, it could be volatile and challenging for the next few months. This should not deter investors and their long-term investment plans related to owning stocks and bonds (which have also struggled due to higher interest rates). Volatility is a normal condition and history shows investors are rewarded for staying the course.


Please contact your Janney Financial Advisor if you have concerns about market volatility.


Disclaimer

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.

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