Inflation Soars, but Market Shrugs | Chief Investment Officer

Ahhh, more bad inflation news. But the stock market isn’t very upset about it. This appears to be a case of the news already being baked in, and expectations that this too shall pass.

In May, the S&P 500 dipped 2.1% with the announcement that the Consumer Price Index (CPI) had popped up 4.2% on an annual basis. On Wednesday, when the US Bureau of Labor Statistics (BLS) said inflation has jumped a whopping 7% year over year, the market shrugged, with the S&P 500 edging up by 0.28%.

This morning, the Producer Price Index (PPI), measuring wholesale goods, surged 9.7%, its second largest increase since 2010. Tempering that only somewhat was that food and energy, two key inflation catalysts, were down a bit.

Reaction on Wall Street: The S&P 500 slipped just 0.3% and the Dow Jones Industrial Average stayed in green territory, up 0.33%.

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What gives? Many analysts are saying investors have gotten used to high inflation numbers and believe that the Federal Reserve, which likely aims to start tightening in March, will bring matters under control. They think today’s escalated prices will abate later this year.

“With inflation running hot, concerns about the impact of a meaningful upside surprise had increased, and simply remaining in line with expectations was practically a win,” commented Barry Gilbert, asset allocation strategist for LPL Financial.

Bank of America economists today issued a statement saying they still view inflation as “transitory” (a term Fed Chair Jerome Powell has retired), although they believe high prices will be around for a while. The American Bankers Association, meantime, issued a survey of 16 chief economists from some of North America’s largest banks forecasting inflation to slow to 3.3% this year and 2.3% in 2023.

The California Public Employees’ Retirement System (CalPERS) has engaged financial services company Jefferies about the potential of selling up to $6 billion of its private equity stakes, according Buyouts magazine. This comes just after CalPERS announced it would be increasing the percentage of its portfolio allotted to private equity to 13% from 8% in November.

CalPERS board member Margaret Brown told Secondaries Investor in November that the fund is considering investing in secondaries and divesting from some of its legacy private equity investments.

“We have some really old private equity that’s just sitting there and doing nothing,” she said.

Private equity has performed extremely well for public pensions this past year. Major funds such as the California State Teachers’ Retirement System (CalSTRS), the Maryland State Retirement and Pension System (MSRPS), and the Public Employees’ Retirement System of Mississippi all saw private equity returns of above 50% in fiscal year 2020-2021.

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CalPERS saw 43.8% in private equity returns for the fiscal year ending in June. It was the fund’s best-performing asset class. CalPERS had a total net return of 21.3%.