Inflation Spikes To Levels Not Seen Since 1981
Fears of increasing inflation pushed stocks lower today after the Labor Department reported that consumer prices surged faster than expected in April. The 4.2% increase was the highest inflation rate since the Fall of 2008 with core CPI having the biggest monthly increase since 1981.
The news pushed both stocks and bonds lower with the momentum indicators for each of the major Indices now in negative territory. Today’s fear based selling was highlighted by a 20% increase in the Volatility or Fear Index (VIX) today.
So what is the best course of action for individual investors?
At this time, cutting loose stocks that have broken key support on volume would be a first step. For my work, this would be a drop below your stock’s key 50-day moving average on volume.
This is particularly true if your stock is in the Technology sector, as these high-growth stocks historically underperform during periods of increasing inflation. Growth stocks trade higher due to increased earnings in the future and the value of those earnings will be reduced as inflation lowers their value.
Another course of action is to examine historical precedence to see which groups perform well in periods of rising inflation. A close look at the 1970’s and 1980’s shows that commodity ETFs traded very well during these periods of heightened inflation.
Lastly, and most important, is having a system to stay on top of the market’s action. While today’s spike in inflation was alarming to investors, economists are citing the easy comparison to lower prices during the pandemic as a reason for the sharp rise.
Tomorrow, Producer Prices will be reported as well as other data that will provide further insight into just how fast inflation and interest rates will rise. In addition, the Federal Reserve is citing any current inflation as being transitory and not long lasting, which may help quell fears.
Either way, today’s price action has signalled a near-term shift in investor confidence and taking some action would be prudent.
Having a List of commodity related stocks is certainly a start. This would include Energy and Metals stocks to name a few. As noted, historically, these stocks fare well during periods of heightened inflation.
Subscribers to my MEM Edge Report have been provided a list of suggested holdings in these areas which you can access by using this link here.
Also important would be taking profits as your stock breaks key support. There will be ample time to re-enter your stocks as the market sentiment shifts to a more positive, less fearful environment—once investors wrap their arms around just how fast inflation may rise.