Frequently and without warning mountain climbers venturing above treeline in winter are presented with the threatening combination of heavy snow and high winds, and the natural response is a panicked retreat. Panic while navigating such elements is dangerous, however, and sometimes safety resides above, not below. At the very moment clear thinking is required, terror can prevail, and when it does the result is often catastrophic. Yesterday the Fed’s favored inflation gauge (PCE) rose 3.7% in Q1, well above the expected 3.4%, even as Q1 economic growth slowed to 1.6%, well below the estimated 2.3%.¹ This was a double whammy of bad news for investors, or so it seemed, and the immediate response on Wall Street was panic selling. Let’s consider the potential implications of this unexpected development:
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Higher inflation may inspire the Fed to slow or even reverse planned interest rate cuts, a restrictive reaction that would threaten stock prices and further slow the economy.
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Slower economic growth may inspire the Fed to cut rates sooner than expected to ward off recession. This Fed reaction could cause inflation to re-surge in coming quarters, which would be a major threat to both stock prices and the economy in the years ahead.
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The combination of higher inflation and slower economic growth may cause the Fed to lengthen its interest rate pause and allow the markets to work this rare imbalance out itself.²
What is an investor to do amidst such a dichotomy of threats to precious capital? Let’s consider a few additional factors:
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The Fed is a politically motivated institution, and we are in a Presidential election year. It is highly likely the Fed will lean towards rate cuts, even at risk of higher inflation later. Also, keep in mind the economy disappointed more than inflation in yesterday’s report.
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Following a fearful crowd in a counterintuitive market is generally a costly mistake. I remember a friend describing a freak storm which hit the heavily populated summit of Mt. Washington one summer day years ago, and the chaos that ensued as dozens injured themselves rushing down the mountain in 90 mph winds, canines included! Pause was the prudent response as the wind, not temperatures, menaced hikers.
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All three of the major indexes are in a bull market and solidly above their respective 200 Daily Moving Averages. Not a single bear market indicator has triggered, to my knowledge.
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We are amidst an earnings recovery, and the economy has in the past two years proven to be remarkably resilient while enduring serious threats.
In conclusion, the recent sell-off seems more likely “a dip to buy” than “a forming bear market to sell”. Should the market surprise, remember stop-loss orders exist for an important reason; have them, follow them, and don’t interrupt the process.
Think about it, Shaun.
“I will both lie down in peace and sleep; for You alone, O LORD, make me dwell in safety” ~Psalm 4:8
1 Investor’s Business Daily, “The Fed’s Key Inflation Rate Sizzles As GDP Slows; S&P 500 Cuts Losses”, April 25, 2025 https://www.investors.com/news/economy/federal-reserve-inflation-rate-core-pce-gdp-q1-sp-500/
2 Stansberry Research, The Stansberry Digest, April 25, 2024
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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