Stock Market Insights: Market plunge – CPI report rocks investors

DR. RICHARD BAKER, AIF®, is the founder of and an executive wealth advisor at Fervent Wealth Management. https://www.facebook.com/Dr.RichardBaker

The swings were the highlight of our county fair. They were the most fun when you had friends riding with you. It was a smooth ride until one of your buddies grabbed an empty swing and hit you mid-ride. It hurt a little, but you knew it was just part of the ride, much like the last few days in the market.

Stocks fell hard on Tuesday, February 13. The Dow Jones Industrial Average dropped 524 points, or negative 1.35%, making it the worst market day since March 2023. The S&P 500 and the Nasdaq Composite also fell, negative 1.37% and negative 1.80% respectively. To not be outdone, the smallcap Russell 2000 Index was negative, almost 4%, for its worst one-day loss since June 2022.

The culprit was a surprisingly strong Consumer Price Index (CPI) report that caused markets to rethink their Fed rate cut expectations. The CPI was barely higher than expected; it rose 0.3% from December to January when most economists expected it only to rise 0.2% month over month. You might think this is ‘Much Ado about Nothing,’ and you wouldn’t be completely wrong.

Betters are going to bet. Sure, this report showed inflation was hotter than anticipated, but stocks were reeling because several investors had been betting on the Fed to lower rates in March. When investors saw that inflation pressure was higher than expected, the odds of a near-term Federal Reserve (Fed) rate cut were slim, and they started selling, causing markets to falter.

It is normal for the market to have these kinds of days. Remember, stocks average three pullbacks of 5-10% each year and a 10% or more drop at least once a year. Experiencing a dip in the market is not surprising.

Regarding Fed rate cuts, it would be wise to plan for inflation to remain sticky and for rate cuts to start a little later in the year than investors want. I feel corporate fundamentals look healthy, and I expect the Fed to make its first cut in May.

The CPI inflation report was a tad hotter than expected, but it just proves that inflation isn’t on a straight path but is on a path headed lower.

With the accounts I manage, I am neutral on equities to fixed income because the risk-reward trade-off between equities and fixed income is nearly balanced. I have my accounts fully invested despite higher valuations and strong year-to-date gains.

The swings at our county fair were set up on the square’s southwest corner. Like some rogue market investors, my junior high buddies were trying to squeeze a little more out of the ride. We wouldn’t just hit each other with empty swings but would kick and spin each other until we got kicked off the ride for the night. We weren’t upset because we knew it was all part of the experience.

Have a blessed week!

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