Inflation is Alive with Consumer Prices up 7%

The stock market retreated and is down 3-6% through 02.10.2022 on a year-to-date basis (YTD) 

Large cap growth stocks have fallen out of favor as illustrated by the 10% decline of the NASDAQ Index.  Investors have been shifting portfolios away from the high-flyer growth stocks to stocks with more appealing price-to-earnings (P/E) ratios.  Stocks’ P/E ratios have declined to 20x but remain well above the 16-18x historical average. We expect the Federal Reserve Board “FED” to increase interest rates four or five times in 2022 to cool off inflation.  Interest rates and P/E multiples move in opposite directions from one another. So, we expect stocks’ P/E ratio to decline as the FED increases interest rates.

On the positive side, corporate earnings are expected to increase 9-10% in 2022. 

If supply rebounds significantly in the second half of 2022, inflation may subside materially.  If this occurs the Fed may not need to increase interest rates to the degree that is currently being anticipated.

Inflation is the most significant economic issue facing our economy in 2022 in our opinion. 

Money supply (M2) expanded by an astounding 40% since the beginning of the pandemic.  Constrained supply, due to businesses shutting down periodically across the globe, and extraordinary government spending are both contributing to the current 7.0% inflation. The FED has the great challenge of curtailing inflation by slowing down the economy, while keeping employment and the economy expanding.

The stock market will likely experience heightened volatility in 2022 with periodic declines of 10% or more (3,600 Dow Jones Index points).

This potential volatility is precisely why we recommend clients maintain sufficient cash and short-term bonds “safety funds” to fund three years of spending needs. Timing the market by jumping out of the market and then back in is typically a futile strategy.

Richard S. Lawrence, CFA / February 11, 2022


We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).