On 05th Aug 2022, the Bureau of Labor Statistics released the Job Report saying nonfarm payrolls increased by 528,000 in July, while the unemployment rate fell to 3.5 per cent.
U.S. stock prices have shown an uptrend on impressive inflation data released on Tuesday. The price report indicates that the Federal Reserve would not have to raise short-term interest rates as high as previously thought.
Despite a lot of talks and analysis from experts on the U.S. economy in the last couple of months, Biden Administration released a positive job report for July on 5 Aug 2022 and impressive Inflation data on Tuesday, 09 Aug 2022.
Many analysts believe the U.S. economy is in good shape, as evidenced by the latest job report and inflation data. Energy prices have fallen, financial markets are showing strength, and the consumer price index is under control as of now. The recession in the United States has been pushed far from happening for some time.
This is all good news for businesses and investors and suggests that the central bank will maintain its current monetary policy. Investing in the stock market may be a good idea at this moment.
U.S. Job report July 2022
Leisure and hospitality, professional and business services, and health care all experienced strong job growth. In addition to an increase in nonfarm employment, the unemployment rate has returned to its pre-influenza levels of February 2020.
According to the economist El-Erian, besides the substantial payroll increase, the jobs report revealed some warning signs, including the declining labour participation rate.
He added that the current labour market strength should not be taken for granted as the forward indicators suggest. The Federal Reserve is still far from achieving its goal of bringing down inflation.
However, El-Erian believes the narrative dominates the stock market that corporate earnings will overcome slower sales growth and higher costs. On the other hand, the sovereign bond market has inverted, with short-term yields rising above long-term yields.
Data source: U.S. BUREAU OF LABOR STATISTICS
U.S. Inflation data July 2022
Consumer and economic policymakers received a timely relief from falling oil prices and airfares in July, although this is hardly a conclusive sign that prices are about to begin declining. With consumer prices slowing down, it is a welcome reprieve for consumers.
As per the Inflation report, the Consumer Price Index rose 8.5 per cent in the year through July, down from 9.1 per cent the last month, a more considerable slowdown than economists had forecast.
U.S. government bonds are sensitive to changes in inflation and monetary policy. The short-term yields are declining, influenced by the Fed’s actions on no significant rate hikes in the coming months as the economy cools down.
The dollar also slipped over 1 per cent against a basket of currencies of major trading partners due to the belief that U.S. interest rates would not rise as much as previously thought.
There are still good reasons to be concerned about inflation. Gas prices plummeted, and they may rise again at any time. However, the most worries regarding rapid wage growth, and housing costs, particularly rents, continue to grow, which might keep inflation high for some time.
The report, in addition to other critical economic information, will be weighed by the Federal Reserve before its September meeting, whether there would be any need to raise interest rates once again.
How did the U.S. stock market react?
U.S. stock market rallied on Wednesday after the inflation data release.
The Dow Jones Industrial Average closed at 33,309.51, up 535.10 points, or 1.63%.
The S&P 500 jumped 2.13% to 4,210.24, its highest level since early May.
The Nasdaq Composite rose 2.89% to 12,854.80, the highest closing since late April.
The S&P 500 tech sector rose 2.8% as financial, and consumer-discretionary stocks gained 2.3% and 2.9%, respectively. Netflix jumped 6.2%, Bank of America increased 3.4%, and General Motors climbed 3.6%.
Investors, the Federal Reserve, and businesses continuously monitor and worry about the level of inflation. Inflation reduces the purchasing power of each dollar we spend. Rising inflation can be harmful.
Stocks are volatile during high inflation. Rising inflation causes a rise in the price of goods and services. High prices discourage consumers from spending money, which is unsuitable for the country’s economy.
When the economy starts suffering, the business also starts dipping. Eventually, the stock market suffers due to the economic slowdown or less consumer spending.
High inflation can be beneficial in some situations because it may spur job growth. On the other hand, high inflation can also squeeze corporate profits by increasing input costs.
Investors may find it indifferent since the current situation of the U.S. economy, and global economic condition look very confusing. However, there are ways and options in the market; with proper analysis and research, you can invest in stocks that can give you an excellent return in the coming years.
Data source: Wall Street Journal
Should you invest in stocks now?
Of course! Investment in the stock market should never stop. The only thing you must be careful about is picking up the right stocks at the right price.
The experts found a correlation between higher inflation and lower equity valuation of a business. However, it is also good news for the financial markets as a low inflation rate reduces the likelihood of interest rates being raised by the central bank.
Researching the company’s financials, business perspective, and financial ratios such as Earning Per Share (EPS) and Return On Equity (ROI) are the basic checks before investing in a particular stock. Examination of historical data during high and low inflation periods and the stock market return can help you make an informed decision on your investment choices.
Historically, the value stocks outperformed the market benchmark if invested for long. Value stocks have positive cash flow and slow growth but dividend-paying solid history.
On the other hand, growth stocks are aggressive in their business operations, predominantly suffer during high-cost environments, and cannot be profitable in the long run. These stocks are volatile, unlike value stocks.
The states’ economic growth will continue to shine, despite economic challenges. So, there is no time for no investment. You only need to do your homework and pick the right stocks with a long-term perspective. Making money in the stock market is a prolonged process with disciplined investment habits.
Quick tips on investing in the stock market during high inflation
- Find investments that can hedge against inflation, such as TIPS, ETFs, and defensive stocks.
- Identify the best sector/s which can do well even during an economic slowdown.
- Be aware of the stock’s supply and demand, keep an eye on leading stocks in leading industry groups, and aim for stocks with strong institutional support.
- Buy a stock once it reaches a buy point, preferably in high volume, after it forms a foundation.
- Investment mix – Don’t forget to diversify your portfolio.