The Facts
All the major US stock indexes dropped dramatically on Mon. as inflation fears intensified. The S&P 500 entered bear market territory - a decline of over 20% from its Jan. highs - after slumping nearly 4% on the day.
The declines appear to have been triggered by Friday's higher-than-expected report on consumer price inflation, which showed that it's rising rather than retreating as some analysts had predicted.
The Spin
Narrative A
Additional steeper interest rate hikes are on the way, and that's bad news for stock prices because it's not just inflation that is hurting businesses. As prices rise and consumers get nervous, businesses will start to cut prices to clear inventory. This will only drive the price of stocks lower as investors see lower profits in the future.
Narrative B
US equities have declined so much, so quickly that they have already priced in the worst-case scenario - the risk of a recession. But a recession isn't inevitable given the current market tailwinds like a strong consumer, the COVID recovery, and policy stimulus in China. Now is the time to diversify and allocate assets back into growth sectors.
Cynical narrative
Inflation is bad news for consumers and savers alike, but it's good news for the irresponsible governments that have racked up decades of unsustainable debt and now need to inflate their way out of it. Central banks aren't too eager to check inflation and will take on more debt and print more money rather than raise rates to where they should be.
