Dougherty Dispatch - Inflation Up - Stocks Down

Today, inflation data came out this morning and it was a bit higher than “experts” anticipated.  They were expecting prices to hike 8.0% over last year (12 months ago), but they came in at 8.3%.  Prices compared to last month were up 0.1%. Economists were expecting a drop of 0.1%.  This increase happened despite a dropping price for gasoline last month.

Ironically, a 0.1% increase in prices is an annual rate of only 1.2%, which is below the 2.0% inflation rate that economists want for the long term.

Nevertheless, the headline is that inflation is not going away fast enough, and if its not, it reconfirms that the Federal Reserve must continue to raise short-term interest rates.  This continued action portends to slow the economy, so short-term stock owners sell off investments, dragging prices down.  (Apple is down 5% today.  Really? It’s the same company it was yesterday!)

However, the real news is that none of this news is new news.  Back in June when the Fed’s rate was 1.0%, the chairman told everybody to expect rates to go to 3.50% by end of year.  Sure enough, the Fed raised rates in June 0.75%, then again in July another 0.75%, bringing rates to 2.50%.  My arithmetic tells me that the Fed still has 1.0% to go by the end of the year to get to the Fed’s target 3.50%.    So why should the markets be surprised when recent data confirms that the Fed has to do what they said they were going to do four months ago?

All this confirms what we have been saying in numerous dispatches:  Don’t fight the Fed when investing.  If they are determined to slow down the economy, if we’re investing new money, keep some in cash for the time being.  However, for existing securities owned, don’t panic and sell into the dip, but rather, hold onto these positions because the cycle is temporary and just that:  a cycle.

For those of you want to learn more, we have attached a note I sent to clients who are new investors and building their nest egg for the future.  I ran on at the mouth a little too much, but naturally, they are concerned about this economic cycle.  Names have been changed to protect the innocent!

John D.