Investment professional: Inflation may be bigger problem than thought


Written by:


Running Out of Steam

The opening paragraph of my 2022 Outlook, titled “Running into the Wind,” included this phrase: “As a runner, and one who actually prefers to run in less than ideal conditions because it feels like more of an accomplishment afterwards, I can’t help but think that the investor in 2022 will face similar challenges to a runner in inclement weather.” Now, I do like running in the rain, but a torrential downpour is another story. Perhaps I should’ve been more specific.


Related: How rising inflation affects mortgage rates

First Half: Glad it’s Over

Admittedly, I was foreseeing something along the lines of a disruptive thunderstorm, but what we had in the first half was more like a series of destructive tornadoes. We knew we were facing an inflation problem, but we didn’t yet know it was this big of a problem. We also knew we were heading into a monetary tightening cycle that would challenge risk assets and investor sentiment, but we didn’t expect a war to erupt and create even more fear and uncertainty. I think I speak for many investors in saying I’m glad the first half is behind us. The second one has to be better by comparison…right?

Total returns by index

The Nasdaq first entered bear market territory (-20% or more) on March 7th and remains there today. The S&P 500 took a bit longer, finally falling into bear territory on June 13th, and has bounced in and out of it since, remaining close to that -20% line. These numbers are painful to look at, but we can also frame this as progress on valuations.


Since March 2020, rates sat at zero and markets were pumped with liquidity, allowing multiples like the price-to-earnings ratio of many stocks to soar to rather unthinkable levels. Although it was a fun ride to the top, we all worried that the dreaded “mean reversion” trade would have to take hold at some point. Valuations were well above historical averages, and we were on the precipice of a rise in rates. One of the positives we can take from this is that we’ve made quite a bit of progress on bringing valuations back down to palatable levels.

Price/earnings ratio

The last thing I’ll highlight about the first half is the bond market, although there aren’t many “highlights” to speak of. The spread between 2-year and 10-year Treasury yields is a widely watched indicator of economic fear, with the dreaded inversion (when the 10-year yield falls below the 2-year yield) as the harbinger of rough waters ahead. We saw two instances of inversion, although shallow and brief, which further fueled the recession debate.


It’s safe to say, the first half was fraught with reasons to worry. Here’s what I think the second half could hold:

Second Half: Bottoms and Bounces

Much of what the market has struggled with is the macro environment and policy shifts that have presented a new, and challenging, environment for consumers and corporations alike. A 40-year high in inflation, aggressive Fed rate hikes, and a new all-time low in consumer sentiment is the set-up we begin the second half with. It could be better, but it also means we’re confirming the economic slowdown that was necessary to cool inflationary pressures.

One Thing Leads to Another

We’ve known for some time that the biggest problem our economy faces is inflation and that problem worsened in the first half. The Consumer Price Index reached 8.6% year-over-year in May, its highest reading since Dec 1981. Although there is much debate over whether this is a demand problem or a supply problem, I’ll settle on saying it’s both, and the only thing the Fed can affect is demand. The real conundrum is how quickly inflation will actually fall before becoming entrenched in the economy and completely resistant to policy tools.


In order for inflation to show “clear and compelling” (in the words of Jerome Powell) evidence of cooling, demand and economic activity need to slow. We’ve seen the start of this in weaker housing market data, retail inventory buildup, a decline in consumer sentiment, and a negative Q1 GDP print.

The Inflation Elephant

Prices haven’t fallen yet, but I’m optimistic that they will — not down to the Fed’s 2% target, but at least below 8% and possibly below 6% by the end of the year. Weaker data points should continue to roll in — the sooner bad news materializes, the more of a bite it can take out of demand, and the faster inflation can fall. Oddly, I welcome the negative headlines for a while.


One way to measure the market’s expectations for inflation is to look at breakeven rates (the rate that makes an investor indifferent between nominal-yielding bonds and inflation-protected bonds of a similar maturity). Even though we want to see these fall further, inflation expectations have already fallen considerably over 2-, 5-, and 10-year horizons. As econ data weakens further, these should drop in response.

Market inflation expectations

If a drop in expectations is coupled with three or more month-over-month declines in CPI data, the Fed is likely to retract its claws. Until then, however, we are on this tightening path and I don’t see the market finding a reason to believe the Fed isn’t a threat until later in summer or early fall.

Is Recession the Only Cure?

The answer is, no. But it’s becoming increasingly likely. I say that bluntly to just get it out of the way and hopefully make readers and investors less afraid of the dreaded r-word. Fed hiking cycles tend to lead to recessionary conditions. Add the rise in oil prices, stubborn inflation, worsening credit conditions, more than one yield curve inversion, weak consumer sentiment, and the case for a recession is mounting. Not to mention we’re already halfway to the technical definition of one, which is two consecutive quarters of negative GDP growth.

GDP by category

I’ll stop short of assigning a probability to the chance of recession. It is worth noting, however, that oftentimes we don’t find out we were in a recession until it’s already over. There’s a chance this time is similar. It’s also worth noting that some Q2 GDP estimates are much lower than the consensus of 3%; in particular, the Atlanta Fed expects a number closer to -2.1% growth. Second quarter GDP results will come on July 28th and market eyes will be watching closely to find out if we’ve actually been in a recession this whole time.


If we have, it’ll go down as a weird one — with a labor market historically tight and still 5.5 million more open positions than unemployed persons, home prices still growing at 20% year-over-year, and corporate earnings showing 10%+ growth expectations for the second half. I tend to think the riskiest fallacy we could fall into is thinking that if we are in a recession now, it absolves us from having another anytime soon. In fact, since this one would be so “unconventional” I think it could be a head fake, with a more classic recession (one where the unemployment rate rises, consumer spending contracts, and corporate earnings turn negative) still possible in the next 12 months. That’s what would be called a double-dip recession and is something we haven’t experienced since the early 1980s, but it did help solve the inflation problem in that period.

Searching for Bottom

Despite many efforts by investors and pundits to call the bottom, pick the bottom level, or time the perfect buy signal, the chances of getting it right are slim. Not to mention, there are a number of different bottoms we need to see as signals that the worst is behind us — namely, a market bottom (which usually happens first), a bottom in corporate earnings growth (which usually follows a market bottom), and a bottom in economic data (which usually happens last).


We still can’t be sure we’ve seen the low in markets, but I feel confident in saying we still haven’t seen the low in earnings or economic data. Despite some downward revisions, corporate earnings expectations are still calling for growth of 11.8% in Q3 and 11.0% in Q4, with full year estimates at 10.8%.

S&P Year-Over-Year

Even if we manage to avert recession, the inflationary picture and sharp contraction in capital markets make these estimates feel too optimistic, and I expect downward revisions across multiple sectors in coming months.


Although that would be a “normal” part of a slowing economy, markets may see further downside on the news because it starts to beg the questions: When does it stop? And what will it hit next?


What it’s likely to hit next is the labor market. It’s no secret that we’ve had a shortage of labor supply in the U.S. since reopening began, and that remains the story today. The last JOLTs report showed 11.4 million open positions, and the last unemployment report showed 6 million unemployed persons. But as corporate profit margins get squeezed by inflation pressure, changes in consumer behavior, and lower stock prices, we are more likely to hear about hiring freezes and layoffs in some industries, and the labor market will loosen. This part takes time, and as mentioned above, falls in the group of economic indicators that tend to be last to crack.

Still Running, Still Windy

When we started the year, uncertainty was a 10/10. It’s been a rough ride so far, but at least we’ve done some work.


Although my commentary above about earnings needing to come down, the economy not yet bottoming, and the impossibility of calling a market bottom accurately probably wasn’t the best pep talk, it does indicate that we’re closer now to some of these bottoms than we were in January. I believe this summer season will hold some of the most important months of data, and the fall can hold more promising moves as a cooling economy begets cooling inflation. The remaining wild card will be the Fed and whether its tightening cycle will prove to be effective at bending, but not breaking, the economy.


The market falls first and the market bounces first. The first couple months of the second half may still be a time to cherish your cash positions, but make sure your list of long-term buys is ready and get prepared to start shopping. If I’ve learned anything as an investor, and as a runner, it’s the long run that’s most rewarding.


Learn More:

This article originally appeared on and was syndicated by


Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at

More from MediaFeed:

9 smart investments to hedge against inflation


It’s no secret that inflation has arrived and is here to stay. To protect yourself from the adverse effects of inflation, it’s essential to invest your money in smart ways.



fizkes / iStock


A few things can cause inflation, but the most common is when the government prints more money than there is demand for. Printing more money causes the value of each dollar to go down, and it becomes more expensive to buy goods and services.




Inflation can have a lot of adverse effects on the economy. When the value of money goes down, people tend to hold onto their cash instead of spending it.


Not spending money can lead to a decrease in demand, which can cause businesses to lay off workers or even go out of business.





Inflation can also affect asset values. A decrease in the value of money can lead to a decrease in the value of these assets. For example, when the value of money goes down, it can be more expensive to buy stocks and other investments.



marchmeena29 / istockphoto


There are a few things you can do to protect yourself from inflation. One is to invest your money in assets that will maintain their value over time. Another is to keep up with current events and make sure you know how inflation affects the economy. Finally, make sure you’re not taking on too much debt, as inflation affects this.


Here are nine investments that can help you protect your savings from inflation.




TIPS, or Treasury Inflation-Protected Securities, are a type of bond issued by the U.S. government. The value of these bonds increases as inflation rises, so they can be a great way to protect your money from the harmful effects of inflation.


The downside of investing in TIPS is that they tend to have a low yield, so that you won’t earn a lot of money on your investment. However, the security of knowing your investment is protected from inflation makes them a wise choice for anyone looking to shield their money from rising prices.




Bonds are another investment that can help you protect yourself from inflation.

Bonds can be a great way to make sure your money is safe and will maintain its value even if inflation rises. When you buy a bond, you’re lending money to a government or company in exchange for regular interest payments over a set period of time.


The downside of investing in bonds is that they can be risky if the company or government you’ve lent money to goes bankrupt. So, it’s essential to do your research before investing in bonds and know exactly to whom you’re lending money.


Gold is a popular investment during times of inflation, as it tends to hold its value even when the dollar falls. The preservation of its value makes gold an excellent option for anyone looking to protect their money from price fluctuations.


The downside of investing in gold is that it can be expensive, and there’s no guarantee that the price will go up over time. So, it’s essential to do your research before buying gold and make sure you’re comfortable with the risks involved.


Real estate is another asset that often performs well during times of inflation. When prices rise, people tend to invest in real estate to earn a higher return on their investment. The earning potential can make real estate a wise choice for anyone looking to shield their money from inflation.


The downside of investing in real estate is that it can be risky, and it can take a long time to see a return on your investment. So, it’s essential to do your research before buying property and make sure you’re comfortable with the risks involved.


Commodities are items like gold, silver, oil and wheat used as investments during times of inflation. They are used as investments because they tend to hold their value even when the dollar falls.


The downside of investing in commodities is that they can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying commodities and make sure you’re comfortable with the risks involved.


NiseriN / iStock


Mutual funds are a type of investment that allows you to invest in various assets, including stocks, bonds, and commodities. Mutual funds can be a great way to spread your risk and protect your money from the adverse effects of inflation.


The downside of investing in mutual funds is that they can be expensive, and it can take a while to see a return on your investment. So, it’s essential to do your research before buying into a mutual fund and make sure you’re comfortable with the risks involved.


Stocks are another option for protecting yourself from inflation. When you buy stocks, you’re investing in shares of a company. Investing in these shares means that you become part-owner of the company and stand to earn dividends if the company does well.


The downside of investing in stocks is that they can be risky, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into stock and make sure you’re comfortable with the risks involved.


Pinkypills / istockphoto


Silver is a type of commodity that often performs well during times of inflation. Silver performs well because it tends to hold its value even when the dollar falls.


The downside of investing in silver is that it can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into silver and make sure you’re comfortable with the risks involved.


alexis84 / istockphoto


Floating-rate bonds are a type of bond that has a variable interest rate. Having a variable interest rate means that the interest rate will change depending on how the economy is doing.


The upside of investing in floating-rate bonds is that they offer a higher return than regular bonds and are less risky than stocks or commodities.


The downside of investing in floating-rate bonds is that they can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into a floating-rate bond and make sure you’re comfortable with the risks involved.


JJ Gouin / istockphoto


Inflation can be a severe threat to your financial security. However, by investing in the right assets, you can protect yourself from its adverse effects. So, before you invest your money, make sure you understand how inflation can impact your portfolio and choose investments that will help you stay ahead of the curve.


This article originally appeared on and was syndicated by






Deposit Photos


Featured Image Credit: Depositphotos.