MOLINE, Ill. — Over the last week, the benchmark S&P 500 stock index dropped 2.1%, NASDAQ dropped 2.7% and DJIA fell 1.7%.
Mark Grywacheski with the Quad Cities Investment Group joined WQAD's Ann Sterling to discuss the stock market and inflation outlook for 2023.
Last week was yet another setback for investors as the major stock market indexes all fell heavily for the second week in a row. Both Wall Street and Main Street investors had hoped the worst of the 2022 stock market decline was behind them. But the recent two-week sell-off has many questioning the future outlook for the stock market as we soon enter 2023.
Sterling: What is causing this heavy sell-off in the stock market we’ve seen over the past two weeks?
Grywacheski: We need to remember what caused this initial sell-off back in late December/early January in the first place. It was concerns over extremely high inflation, but more importantly, what that high inflation would trigger. To get this high inflation under control, the Federal Reserve would need to aggressively raise interest rates- which it has been. In fact, on Wednesday, the Fed raised the fed funds rate (which often serves as a basis for many forms of debt) to its highest level in 15 years. We’re expecting even more rate hikes next year. We’re already seeing the negative consequence to economy from this combination of high inflation and high interest rates: slower economic growth, slower consumer spending, a heavy decline in the housing market, reduced capital expenditures by business. This recent sell-off is reflecting Wall Street’s concern that we’re more and more likely to get a recession next year in 2023.
Sterling: What’s your thoughts on the stock market for next year and what advice do you have for investors?
Grywacheski: This is a stock market that’s going to require patience. In the entire 130+ year history of the US stock market, the market has always recovered, it’s always went on to set new all-time highs. We just don’t know how many days, weeks or months that will be. But this is a stock market that will likely remain quite volatile until Wall Street gains some level of comfort that inflation is finally under control. And unfortunately, Wall Street has yet to gain that comfort.
Sterling: On Tuesday, the Department of Labor reported that inflation fell from 7.7% down to 7.1%. Do you think the worst of this inflation is behind us?
Grywacheski: I do think the 9.1% inflation rate reported in June was the peak of this current inflationary cycle. I think the focus now is how fast do we see a return to that ideal 2% target rate of inflation we had back in early 2021. Even though inflation has fallen from 9.1% to 7.1%, that’s still an excessively high rate of inflation that inflicts a lot of pain on consumers and businesses.
Sterling: There are a number of experts who say that Tuesday’s inflation report signals we’ll get a rapid decline in inflation. Do you agree with that and why?
Grywacheski: Throughout all of 2021 there were a number of experts saying that we shouldn’t worry about inflation- that it would be mild short-term. But from the very beginning, in all my public commentary and many times on this segment I argued that inflation would actually be quite severe and long-lasting. Unfortunately, that’s what happened. Again, I disagree with the assessment that we’ll see a quick return to a 2% rate of inflation. Yes, we’re seeing some improvement in the labor shortage and supply chain issues which helped add to inflation. But we still have a massive amount of money that’s been added to the economy. And that’s why I think inflation will remain above that 2% target rate for well into 2024.
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