Why the Stock Market’s Inflation Worries Don’t Make Sense

We’ve been seeing some scary inflation numbers recently.

The consumer price index rose 8.6% from last year in the latest report. These eyewatering levels have gone on for months, spooking consumers and markets.

The S&P 500 is down 20% for the year, largely due to worries about inflation.

But strangely, bond markets are actually predicting lower levels of inflation now then when the S&P 500 was at its peak!


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The key number to look at is the 5 year breakeven inflation rate. This figure measures the difference between yields on inflation-protected Treasuries and yields of Treasuries without that protection.

The difference between those bond yields shows how much inflation investors expect.

Markets peaked at the end of 2021. At that time, investors expected inflation of about 2.9% a year over the next five years.

Now, investors expect inflation of just 2.6% through 2027.

The stock market is freaking out about inflation. But the much larger bond market actually predicts falling levels of inflation.

Perhaps what’s really causing the turmoil in stocks today is psychology. People are terrified of losing their money.

That’s a legitimate fear, but it doesn’t have anything to do with the realities of the inflation rate.

I suspect inflation will moderate in the coming few quarters, in line with the bond market’s expectations. And as that happens, I expect stock markets to rise.

Until then, I’m holding my stocks.

What do you think is next for stocks and inflation? Leave a comment at the bottom and let me know!

There will be no blog on Monday for the holiday. I’ll see you on Tuesday.

Have a great holiday weekend everyone! 👋

More on markets:

Hedge Fund Giant D1 Loses $7 Billion in 2022

The End of Celsius — the Beginning of Crypto Regulation

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

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Photo: Federal Reserve Chair Jerome Powell

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