Markets Brief: Will the New Inflation Story Hurt Stocks?

Insights into important market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer

Dan Kemp 15 April, 2024 | 2:22PM
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The latest inflation data grabbed the attention of investors last week. Core consumer prices (which exclude volatile food and energy) rose 3.5% over the previous twelve months compared to 3.2% last month and expectations of 3.4% (Source: MarketWatch). The threat of more persistent inflation challenges the previous narrative of lower inflation leading to lower interest rates. The concern this raised for investors likely contributed to the Morningstar US Market index falling 1.63% over the week. 

Investors Now Expect Fewer Rate Cuts

The change in investor expectations can be most clearly seen in the fact that investors believe that the probability of at least three interest rates cuts this year has fallen to 28% down from 68% a month ago. A more pessimistic view of inflation can also be seen in the bond market with the 10 year US treasury bond now yielding 4.52%. While lower than its peak in the 4th quarter of 2023, it is significantly higher than the year-end yield of 3.87%. 

Big US Banks Causing a Stir

Financial companies were in the spotlight as they reported their latest results. The reaction to JPMorgan Chase was notable. Against a background of weakening sentiment, investors appeared to ignore the strength of the business over the first quarter and expressed their displeasure with JPMorgan Chase’s neutral outlook.

Despite the stock price falling 6.47% on Friday, Morningstar banking analyst Suryansh Sharma continues to believe that the US’s largest bank remains overvalued.  You can read his take on the results and the outlook here.  Other notable banks sharing their quarterly financial scorecard last week were Citigroup and Wells Fargo. Neither suffered the declines that JPMorgan experienced, reminding us that disappointment is often most keenly felt where expectations are highest and consequently, periods of negative sentiment create opportunities for long-term investors to buy high quality businesses at attractive prices.

Sticky Inflation, Falling Prices?

While there are few significant economic releases this week, market commentators are likely to seek confirmation of the new narrative that inflation is ‘stickier’ than previously thought and therefore interest rates will be higher for longer. It is a short logical leap from there to the belief that the economy is likely to slow and profits will be harder to come by. While the perspicuity of this view will ultimately be revealed by data, the narrative may be sufficiently beguiling to lead to further price falls.

For those hoping to make good decisions in these situations, it is essential to have a robust estimate of the ‘fair value’ of investments in which you are interested. In the absence of the research required to provide this important anchor to your decision making, continuing to invest and focusing on the benefits of participation in the long-term growth of equities is a better plan.


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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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