New Inflation Data Hammered the Dow Friday

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Heading into Friday, investors knew that highly anticipated inflation data could make or break the market today. Unfortunately, things took a turn for the worst.

The Dow Jones Industrial Average sunk 880 points after new data for the Consumer Price Index (CPI) showed that consumer prices kept moving higher in the month of May. The CPI tracks a basket of daily goods and services and is one piece of data that investors use to measure inflation.

The U.S. Bureau of Labor Statistics released new data this morning that showed the CPI rose 8.6% on a year-over-year basis, which came in higher than economists’ 8.3% estimate. In April, the CPI was up only 8.3% year over year, which is high, but lower than the 8.5% figure seen in March. Many investors assumed that inflation might have peaked, but this latest data casts doubt on the narrative.

If inflation is still indeed rising, then the Federal Reserve’s job of taming inflation without tipping the economy into a recession just got a whole lot harder. The longer inflation persists, the more aggressive the Fed needs to be with its monetary policy whether it’s raising its benchmark overnight lending rate or reducing its nearly $9 trillion balance sheet, which further increases the risk of hurting the economy.

Image source: Getty Images.

The big losers

All but one stock in the Dow finished down today, as inflation seemed to overwhelm almost every sector of the market.

Many financials including Goldman Sachs (GS -5.65%), JPMorgan Chase (JPM -4.60%), and American Express (AXP -4.08%) unsurprisingly found themselves among the worst performers in the Dow, as banks can be very cyclical businesses and very linked to the economy. While banks are about to enjoy the most emphatic rising-rate environment they’ve seen since the Great Recession, which tends to benefit their business, too much inflation can hurt their businesses by slowing down economic activity and as loan losses rise, especially in a recession.

Shares of the chemicals company Dow (DOW -6.06%) fell more than 6% today and was the biggest loser in the index.

Interestingly, financials stocks and a company like Dow are often seen as good companies to own in times of rising rates and inflation but too much of each can drag down any sector. Investors are also growing increasingly concerned about a recession or even stagflation, which can be categorized by high levels of inflation, muted economic growth, and high unemployment rates as well.

What to make of this new inflation data?

While I am not going to sit here and say this is a good report from the CPI, it doesn’t necessarily mean the economy is headed for a severe recession or that inflation is still soaring. Remember, this recent CPI data is for the month of May. 

While it’s not that long ago, Target (TGT -3.16%) earlier this week trimmed its outlook due to a backup of inventory it is trying to get off its shelves, largely as consumers shift away from discretionary categories and get back to spending on services. But the CPI shows monthly growth in pretty much every category so it’s possible we haven’t seen the impact yet from what Target just warned about.

This means there’s still hope that inflation has peaked, although it could still take some time to play out. I also still think a severe recession is avoidable given how strong the consumer and labor market still are, all things relative.

If the U.S. economy can avoid a severe recession, then bank stocks and Dow are good buys right now after the pullback today.