Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Inflation on the Rise

Mar 16, 2022

If you think prices are going up (and not just for gas), you are right. In our household, the biggest price increases are with meats, bread, cereal, dog food, fruits, and organic milk. My wife has commented on the rising cost of my morning routine of cereal, blueberries ($5 a basket), and milk. I commented on how much our dog eats.

In our Weekly Brief, “Future of Inflation”, we discussed the importance to monitor both the Producer Price Index (PPI) along with the more widely reported Consumer Price Index (CPI) to determine the current trend and possible future range of inflation. We highlighted that the PPI is the cost to manufacturers, and changes to this industry may provide insight into the future of retail prices to consumers.

Today the February PPI report was released, indicating continued price increases to manufacturers. After the dramatic drop in the PPI in early 2020, prices have soared. For the past month, the final-demand producer price index increased 0.8% month over month (MoM) and is up 10.0% year over year (YoY). The February annualized national inflation rate is 7.90% and up from the 7.50% annualized rate posted in January.

Econoday had this to say about the PPI report:

“Producers are facing significantly higher costs in the near term in commodities in amounts that are hard to absorb, especially after a long string of upward price moves. There are a few hints that some of those pressures were abating. However, the data was compiled before the war in Ukraine started, and the relief is likely to be short-lived.”

Price increases are especially impacted by continued shortages and supply disruptions. In addition, compounding the current imbalance of supply and demand are consumers buying more goods due to concerns about the war. Some of the factors that are creating the unusual supply and demand imbalance are short-term and will be resolved. However, as most people experience with prices and taxes, they rarely go down. The possibility is prices may stop increasing later this year but may not retreat to 2021 levels.

The major indices peaked on November 23, 2021 and since have experienced a mild correction. Year to date the following are the returns of the major indices:

S&P 500 | -9.03%
NASDAQ | -17.23%
DJIA | -7.69%
S&P 600 (Mid Cap) | -8.47%
S&P 400 (Small Cap) | -9.03%

Considering all the negative news the media is pounding out about Ukraine, inflation, rising interest rates, supply disruptions, etc., you would anticipate the indices to be down more. Also, after two strong years of the major indices with the S&P 500 up a cumulative 47%, I would anticipate more selling for profit-taking. NASDAQ and the technology sector, which is leading this selloff now down -17% YTD, has to be put in perspective that in the past two years, NASDAQ is up almost double the S&P 500, gaining a cumulative 74%. So, the sector that had the strongest rally would sensibly be the same sector experiencing the greatest selloff. Taking the period of January 1, 2020, before the massive pandemic selloff, through December 2021, the major indices have gained a cumulative return of the low of 27% (DJIA) to the best of 74% (NASDAQ), with the S&P 500 gaining 47%.

Investors riding through these market cycles have had the better part of the bargain. This correction is a typical reaction after two strong years. Corrections always have a reason, in this case, Ukraine, interest rates, and inflation, but the reality is a correction was in the making. If institutional investors were truly concerned about the state of the US economy and future business valuations, the major indices would not be down a mere 9% in 2 ½ months. When institutional managers want to sell, they can quickly as experienced in February 2020.

What Does This Mean to Me?

In our opinion, this correction is favorable to establish new buying opportunities for companies with solid growth potential and earnings. Most likely institutional investors will continue to “bottom feed,” picking up selected stocks as they dip to attractive prices. Today and last Monday, Tuesday, and Friday, were all days the S&P 500 rallied 1% or more, indicating the buying appetite of investors. As mentioned, if institutional investors were truly concerned about the issues the media is pressing, the selling would be far more aggressive, and days like today with the DJIA up 599 points would be unlikely.

Give us a call if you have any questions about your account, or prepare a financial plan to chart your retirement game plan. We welcome the opportunity to provide you with the guidance and strategy to achieve your goals.





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