Inflation, epidemic and war? Markets priced it in.

Instead of making useless expectations, we can plan for a wide range of outcomes. But doing so requires honest thinking – and the ability to see past current news. Just as too much optimism can lead you to make foolish bets, excessive gloom can lead to panic — which, in this case, could mean fleeing investments in both stocks and bonds, because both major asset classes have performed poorly.

Instead, in stressful times like these, it’s worth appreciating the profit potential inherent in frighteningly low prices. First, always make sure you have enough cash on hand for your emergency needs. But then, if you invest steadily in diversified, low-cost index funds that track the entire stock and bond market, those lower prices can be a blessing, assuming the markets eventually recover. History suggests they will.

It would be easy to give up on the markets.

The bad news of hyperinflation was hard to miss. Prices for a wide range of goods and services have risen rapidly, but recently, the situation has only gotten worse. The latest government report on the Consumer Price Index showed that overall inflation in the United States rose at an annualized rate of 8.5 percent in March, the highest pace since December 1981. A variety of other inflation measures were also worrisome, in the United States and around the world.

John Potters, chief research analyst at FactSet, a research firm, wrote in a report dated April 12 that 65 percent of S&P 500 companies that reported their earnings for the first quarter of this year cited inflation as their biggest problem. He cited this comment on an earnings call from Lawrence Corzios, CEO of McCormick Global Foods: “Cost inflation has held steady with the recent escalation in some areas such as transportation costs. As such, we have raised our guidance on cost inflation. It is now a medium to high increase in Teen “.

The three main causes of the current inflation explosion are well documented and include:

  • A combination of stimulus fiscal and monetary policy taken to support the economy’s recovery from the coronavirus recession of 2020.

  • Supply shortages caused by the pandemic, which range from a scarcity of spare parts for cars to bottlenecks in factories in China, to an insufficient number of workers willing and able to take on jobs at prevailing wages.

  • The Russian war in Ukraine and Western sanctions on Russia, together, have increased the prices of energy, food, and a host of other goods, and contributed to supply shortages.

However, the problem of hyperinflation is not a new discovery. A year ago, it was clear that prices were rising fast enough that it had to be taken seriously. I mentioned it at the time and so did many others.

The Russian war greatly complicates matters. However, it is at least possible that inflation is about to recede. James Paulsen thinks so. He is the chief investment strategist at the Leuthold Group, an independent equity research firm in Minneapolis.

“I think we might be at a tipping point,” he said in an interview. “There is a good chance that inflation has peaked or is very close to its peak.”

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