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Donald Trump’s plans to gain control of Greenland may be grabbing the headlines.
But don’t get distracted by flashy articles like these… because you could miss quieter news that’s far more important to your brokerage account.
This week, buried inside a report, we learned some important news about the inflation situation.
Every month, the Institute for Supply Management (ISM) releases data on the Manufacturing and Services sectors of the economy.
A reading above 50 indicates expanding activity. Below 50 means things are contracting.
Just the other day, the Services figure came in at 54.1. That’s up two points from the prior month. It’s also well above the 50 mark showing expansion. And this marks the sixth straight month in which Services activity expanded.
That seems like good news for the economy… but the ISM’s report also delivered us a warning.
And investors shouldn’t miss it among all the other noise…
Rising Inflation
The ISM report looks at trends across things like employment, new orders, and inventories.
It also takes a look at inflation. And things are getting ugly again.
The ISM report includes a reading of the prices that Services organizations themselves are paying for materials and services. And this “Prices Paid” component jumped to 64.4 in December’s report.
That’s up from 58.2 in the prior month and is the highest reading since early 2023.
You can see that in the chart below:
The Prices Paid component bottomed in March 2024 and has been rising since then. The 6.2-point increase in a month is the latest piece of evidence that inflationary pressures are picking back up.
Following the Federal Reserve’s last meeting of 2024, Fed Chair Jerome Powell even admitted that the central bank’s inflation forecast has “kind of fallen apart.”
So investors hoping that the market’s smooth sailing would continue into 2025 might have to think again. If history is any guide, accelerating inflation could hit everything from stocks to bonds…
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Inflation’s Impact
Inflation isn’t just a hidden tax that reduces the purchasing power of your dollars. It’s also a tax on your investment portfolio.
That’s because inflation works against stock and bond prices as well.
Bond investors receive fixed coupon payments. But inflation erodes the purchasing power of those payments. To compensate for rising inflation, investors demand higher bond yields.
Bond prices move in the opposite direction of yields. So rising yields push bond prices lower.
For stock prices, high inflation (and thus higher interest rates) make future profits worth less in today’s terms. That makes valuations more susceptible to a downturn when inflation is moving higher.
Inflation was the key driver behind 2022’s bear market, for example. That period featured one of the worst returns ever for retirement portfolios.
The cornerstone 60% stock/40% bond retirement portfolio fell by 17.5% in 2022 as inflation rose. There was nowhere to hide as inflation took a bite out of both stocks and bonds.
Of course, we may not see that level of pain this year. But inflation is still moving in the wrong direction.
So instead of wondering if Greenland is about to become the 51st state, focus on the trends that really matter.
And don’t be surprised if inflation gives the market a headache in the coming months…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict