“Asset prices have become a lever that the Fed is using to reduce the price pressures,” Michael Farr, chief executive of the financial advisory firm Farr, Miller & Washington, wrote in a note to investors. “The strategy, which seems fraught with peril, is designed to trigger a reverse wealth effect, tamping down asset prices so that people feel less wealthy and therefore spend less. Lower spending means less demand, which means lower inflation. At least that’s the hope.”
It’s a hope Mr. Farr is tenuously clinging to. He noted that indicators of inflation expectations show that investors “continue to believe that the Fed will be successful in bringing down inflation over the intermediate term.” If it is, that would help markets recover, even in the absence of a dovish pivot.
Tony DeSpirito, chief investment officer of U.S. Fundamental Equities at BlackRock, is also optimistic.
“In the near term, I can see inflation rolling over,” he said. “A number of companies are reporting excess inventories, home price growth has turned a little negative. The real question is how fast it comes down, and to what level.”
He expects the Consumer Price Index to settle around 3 or 4 percent. But inflation is likely to remain a chronic problem, in his view, as certain trends that kept it in check for decades, notably trade liberalization, subside and the emphasis shifts from efficiency in supply chains to resiliency.
“The long-term disinflationary impulse has ended,” Mr. DeSpirito said.
As for short-term inflation, if the Fed is trying to curb it by actively targeting asset prices, at least it has accomplished the targeting part. The average domestic stock fund fell 4.2 percent in the third quarter, according to Morningstar, with technology, communications and real estate portfolios underperforming.
The average international stock fund lost 9.5 percent, with Europe and China funds faring especially poorly.