Is Inflation Slowing

The combination of high inflation and the US Federal Reserve’s response with higher interest rates has puzzled investors and consumers alike. Inflation impacts the stock market and makes consumers less likely to spend. However, the recent Personal Consumption Expenditure (PCE) report suggests that inflation is slowing. Moreover, the Gross Domestic Product (GDP) returned to positive territory after 6-months of mildly negative readings. The stock market responded positively.

Image: Dividend Power

Stock Market Overview

The stock market had a positive weak, with the Dow Jones Industrial Average (DIA) outperforming other indices except the Russell 2000. However, as shown by data from Stock Rover*, the Nasdaq performed poorly on a relative basis because of either poor results or guidance from several tech stocks. For example, Microsoft (MSFT) and Amazon (AMZN) were down meaningfully for the week contributing to the Nasdaq’s poor performance (QQQ).

All sectors rebounded except Communication Services. The Industrials sector had two excellent weeks on the promise of lower future inflation and slower rate increases.


Source: Stock Rover*

For the year, the Dow 30 is no longer in a correction, and the S&P 500 Index is no longer in a bear market. However, the Nasdaq is still in a bear market.


Source: Stock Rover*

Dividend growth stocks have performed relatively well, outperforming the S&P 500 Index and Nasdaq in all instances. The table below shows their performance by category including the Dividend KingsDividend AristocratsDividend ChampionsDividend Contenders, and Dividend Challengers.

Category YTD Return (%)
Dividend Kings (-7.6%)
Dividend Aristocrats (-7.4%)
Dividend Champions (-3.5%)
Dividend Contenders (-16.1%)
Dividend Challengers (-10.1%)

Source: Stock Rover*

Is Inflation Slowing or Is It a Head Fake?

Inflation is slowing, according to the PCE report. The September reading was 6.2, the same as August and lower than May to July. However, the core PCE index was up to 5.1, indicating prices of items besides energy and food are increasing.

That said, inflation is down significantly on a quarterly basis. For example, the PCE index increased by 4.2% in the third quarter versus 7.3% in the second quarter; a sign inflation is slowing. Moreover, excluding the food and energy prices, the PCE index rose 4.5% in Q3 20222 compared to 4.7% in Q2 2022.

Some economists will argue inflation will surge again. But slowing business spending and way consumers and an aggressive Fed, inflation may be tempered in the future.

Gross Domestic Product Is Positive Again

After two-quarters of lower real GDP, it grew 2.6% in the third quarter meaning the economy is back to growth and probably performing well. So not only was it positive, but the results also beat estimates. So far, at least the constant drumbeat of those expecting a severe has been put off for a bit.

US Q3 2022 GDP

Source: US Bureau of Economic Analysis

More for those investors asking themselves, are we in a recession? The answer is likely no because of low unemployment despite two consecutive quarters of negative GDP growth. The unemployment rate typically leaps higher in recessions. But it is 3.7%, and the United States had 21 straight months of job gains. Additionally, the National Bureau of Economic Research has not formally indicated the United States is in a recession.

Final Thoughts on Is inflation Slowing

Slowing inflation is a positive sign for the global and US economies. Furthermore, investors should benefit significantly if the Federal Reserve slows its pace of interest rate increases because they will view it favorably.

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