Today’s Inflation Update: A Great Opportunity to Rebalance

What a great day to rebalance. The market’s down. It’s 1:00 PM. It’s down 3% for the S&P 500. Why did the market react as it did?

So consumer price point numbers came out for August, and prices were up 8.3% year over year. It’s actually a slight deceleration from the month previously due to a 10% drop in gas prices. However, what the market really cares about is core inflation. And core inflation came in at 6.32% versus about 6.1 for estimates, and I think it was 5.8% the month before. So core inflation is still gaining steam. That means it’s pretty much guaranteed that at the next Federal Open Market Committee, there’s going to be another 75 basis point rate hike.

When there’s a 75 basis point rate hike, interest rates go up across the board. Treasuries are already going up in anticipation, and when yields go up, the value of bonds falls. It’s really not just the value of bonds. The valuation of anything is the reciprocal of interest rates. What does that mean in English? If you’ve got a pension, the present value of that pension, if you’ve got a bond, if you own a house even, when interest rates go up, valuations fall.

And that also applies to markets. When interest rates go up, you need a higher threshold or return for a given value. And if there’s no anticipation of those returns growing, then the valuation of the underlying asset drops, and that’s what the market is anticipating. Keep in mind, markets anticipate, and when their anticipation misses the mark, they correct and they correct rapidly. That’s what happened today. Tomorrow I wouldn’t be surprised if there isn’t a very slight bounce back, which is why it’s a great day to rebalance. But they haven’t licked inflation yet. I still have confidence they will, but we’re certainly not out of the woods, and yet, we still have record low unemployment. It is not all as bleak as the six o’clock news would suggest. We wish you the best of investing success.