Selling Stocks on Inflation Fears? Financial Pros Wouldn't

Chris Davis, June 10, 2021

The inflation sirens are wailing, but financial pros say there’s no reason to panic

Inflation is one of those economic terms most of us know just enough about to be afraid of. We know it erodes our money over time, and that it arrives in the form of higher prices for everyday goods and services. Inflation fears can also lead to negative reactions in the stock market, such as the selloff in May. But according to experts, this may be the wrong reaction to inflation news.

But first: What factors are driving these inflation fears? Plenty.

“There are definitely inflationary signals, no doubt,” says Aleksandar Tomic, an economist and associate dean of strategy, innovation and technology at Boston College.

In May, the consumer price index, which measures the average cost of goods around the country, saw a year-over-year increase of 5% — its largest jump since August 2008. This comes on the heels of April’s CPI numbers, which came in much higher than economists had predicted.

“Everybody was thinking it would be 3.6%, which would have been significant given that we’re running around 2%,” Tomic says of April’s CPI report. “The numbers were significantly above expectations.”

COVID-19 relief measures pumped cash into economies all over the world, Tomic says. Those relief measures gave consumers the power to buy at a time when supply was constrained by several factors, including pandemic-hobbled businesses, worker shortages and the Suez Canal blockage.

And by May, there were even more signs of inflation. Bureau of Labor Statistics data showed job openings and the number of people quitting their jobs in April were both at their highest levels on record.

“So there’s a lot of activity, a lot of searching for talent and a lot of confidence, which is why they’re quitting jobs,” Tomic says. “And sooner or later, the wages will start rising.”

If April’s report started the discussion about impending inflation, it appears May’s report bolstered it even further.

“This time, inflation is coming from all sides,” Tomic says.

But here’s the kicker: Despite all this, long-term investors needn’t actually fear a surge in inflation — as long as they’ve set up a healthy investment portfolio.

Why experts say you shouldn’t sell on inflation fears

When there’s a whisper of rapid inflation, the market may react by selling. On May 12, when the Bureau of Labor Statistics released the surprisingly high consumer price index data, the S&P 500 saw its worst three-day drop in almost seven months. But why?

“The market always sells first and asks questions later,” says Tiffany Kent, a certified financial planner and portfolio manager of Wealth Engagement LLC in Atlanta.

In this instance, she says the potential for higher inflation scared investors because when inflation rises, interest rates may rise too. And when interest rates rise, it’s possible that company profits could be negatively affected, which could cause their stock prices to drop.

So traders decided to sell in the moment, then spend their time analyzing what it all meant later.

Most individual investors — especially those new to the market — wouldn’t do well taking that same frenzied approach, Kent says. Unless you’re versed in the traditional ways of measuring how valuable a company is, such as analyzing its price-to-earnings ratio, you’re more or less trading on hope.

“And it’s hard to invest in or bet on a hope,” she says.

The better option? Keep your money parked in stocks rather than selling in a panic or trying to time the market, says Matt Canine, a certified financial planner and senior wealth advisor with East Paces Group in Atlanta.

“Historically, stocks in general are the highest returning asset class and are the best hedge against inflation,” Canine says. “That’s one thing we want to impress on people. If you’re currently invested in the market, you’re probably going to be OK.”

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