Investors have weathered one of the most punishing starts to a new year in decades. From Jan. 1 to June 16, the bellwether S&P 500 index fell 23.1%. The S&P 500 consists of the stocks of the 500 leading U.S. companies and accounts for roughly 80% of the value of all stocks listed on the New York Stock Exchange and NASDAQ Stock Exchange. It often serves as a proxy on the health of the U.S. stock market. Likewise, the tech-heavy NASDAQ lost a massive 32%. Of the three major U.S. stock market indexes, the Dow Jones Industrial Average (DJIA) fared best, falling by “only” 17.6%.
The cause of the near six-month decline was lingering concerns over inflation. Since February 2020, the national inflation rate surged from just 1.7% to 9.1%, a 40-year high. For Wall Street, the sell-off reflected the perceived negative impact to consumers, businesses and, ultimately, the American economy.
But this summer provided a flicker of hope for battered and weary investors. In the two months from June 16 to Aug. 16, the stock market delivered a much-welcomed rebound. In what was coined the “summer rally”, investors cheered as the S&P 500 gained 17.4%, the NASDAQ surged 23.1% while the DJIA rose 14.1%. The rebound spurred optimism the worst of the brutal stock market sell-off might well be over.
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The summer rally was fueled on the hope that maybe inflation had peaked and would continue a steady, yet gradual, decline. If inflationary pressures were to ease, the Federal Reserve wouldn’t need to be as aggressive in raising interest rates. With a slower pace of interest rate hikes, there would be less pain inflicted on the economy. Thus, it’s of little surprise the hope for a better economic landscape sent stock prices rising.
Unfortunately, the summer rally was short-lived. Over the past six weeks, the stock market quickly reversed course. Investors watched as the last remnant of the June 16-Aug. 16 rebound suddenly evaporated before their eyes.
Once again, the culprit was inflation. This time, as more and more economic data gets released, it’s become increasingly clear that inflation could remain historically high for quite some time. As for the stock market, its fate seems increasingly tied to that of inflation. And that means that Wall Street will likely remain skittish until it starts to see signs that inflation is finally getting under control.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.
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