2022 Inflation Related Market Selloff

Gary Meagher |

Over the years I’ve heard that the most dangerous statement in the investing world is, “This time it’s different!”  That isn’t to say that history will, or will not, repeat itself. It is simply a warning to understand what drives the markets up and down, and to recognize that there are cycles that tend to repeat themselves. 

I want to begin with my conclusion.  Which is, that in every other downturn in stock market values there has been a point where stock prices quit declining.  After reaching this “floor” they begin to climb again.   I trust that this will be no different.  I believe that remaining calm, confident and invested will prove to be the best course.

One issue that has changed over the past four decades is the high rate of inflation.   In the short-term inflation can produce a negative effect on stock prices.   To rein in inflation the Federal Reserve will take action that raises interest rates.

The increase in interest rates permeates throughout the fixed income markets, and these higher rates attract investment dollars from other assets, such as stocks. This will place downward pressure on the price of stocks.

In addition to that, as banks borrow from the Federal Reserve, the banks will in turn raise interest rates for consumers and businesses borrowing funds. 

Businesses that are in a growth phase will need to pay a higher interest rate to finance their growth.   In addition, these companies will need to pay more for materials and labor.  All of this will negatively affect their profitability.  Even if revenues were to remain constant these higher costs would affect the bottom line.  Revenues, however, may also be affected.  Higher interest rates can be a deterrent to consumers purchasing items using credit.

Changes in earnings and in perceived future earnings will very likely lead to a decline in a company’s common stock price.

It is difficult to determine how long a decline in equities will last.  It is also difficult to determine exactly how far they will decline.  However, historically equity assets do recover and provide shareholders value.

The assets that protect against inflation over the long term are those assets which will rise in value with inflation, and those assets which produce the goods and services that will also rise with inflation.   Among these are Real Estate Investment Trusts (REITs) and other commodities, as well as businesses that produce the items that consumers will continue to buy.  This is why I suggest that we remain invested in the multiple areas of the U.S. economy.

There are many theories as to the cause of inflation.  The one that appears to be the most likely now is the increase in the money supply.   The economist Milton Freidman described inflation as too much money chasing too few goods.   

This means that as the money supply increases the value of our currency, that is the purchasing power of our dollars will go down. This is true, unless we create additional goods and services to offset the increase in money supply.

(Money Supply M2 = currency, coins, checking, savings, and money market accounts, certificates of deposits (under $100,000) and money market mutual funds)

The money supply (M2) increased from $15.33 Trillion at the end of 2019 to $21.81 Trillion as of March 31, 2022.  This is an increase in the money supply of 42% over that time period.   My opinion is that this will ultimately lead to a decrease in purchasing power of about 19%.   According to the Bureau of Labor Statistics we have experienced a cumulative increase of inflation of 11.8% from the end of 2019 through April 2022.

What would make inflation worse?  Either additional increases in the money supply or a decrease in the production of goods and services.  Unfortunately, both of these occurred throughout the pandemic.

What would improve the inflation numbers?  A decrease in the money supply or an increase in the production of goods and services. 

I am hopeful that productivity will increase and the need for addition to the money supply will decrease as the country gets back to business!



Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing includes risks, including fluctuating prices and loss of principal.


The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.