Please ensure Javascript is enabled for purposes of website accessibility

Don't Let Inflation Hype Scare You Out of the Stock Market

By Dan Caplinger – Updated May 12, 2021 at 6:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's important to keep price pressures in perspective.

The stock market suffered another big drop on Wednesday, with economic data coming to the forefront of investors' minds. News that consumer prices rose 0.8% in April stoked fears of uncontrolled inflation that could prompt the Federal Reserve to take drastic action that would endanger the economic recovery. That sent the Dow Jones Industrial Average (^DJI -1.54%), S&P 500 (^GSPC -2.11%), and Nasdaq Composite (^IXIC -2.84%) all down in unison.

As nasty as today's drop looked, though, the reality isn't that bad. Below, we'll look more closely at the inflation numbers and why the market's drop might well have been an overhyped reaction to conditions that are unlikely to persist.

How the market fared on Wednesday

Stock markets lost ground gradually throughout the day and closed at their worst levels of the session. Losses for small-cap stocks were even steeper, with the Russell 2000 index falling more than 3%.


Percentage Change (Decline)

Point Change




S&P 500



Nasdaq Composite



Data source: Yahoo! Finance.

Dismissing the hyperbole

It's easy to portray Wednesday's market drop as being a big deal. The S&P's drop just missed the cut as one of the 20 worst days in the index's history. Hearing about a 682-point plunge in the Dow makes for scary headlines.

But the huge gains in all of the major market benchmarks make point-based moves increasingly misleading. Put another way, a 700-point move for the Dow just doesn't mean what it used to mean. Daily moves of 1%, 2%, or even 3% simply aren't all that uncommon when you look back at stock market history, and if anything, the markets have been less volatile over the past decade than they were back when index levels were much lower.

Moreover, markets aren't that far off their all-time record highs. The Dow closed just 3% below its highs, and the S&P is just 4% under its record. The Nasdaq has taken a bigger hit, but even it's down just 8%. Indexes reached those levels for the first time ever just earlier this year, leaving intact a huge portion of their past gains.

Rising denominations of U.S. currency in side-by-side rolls.

Image source: Getty Images.

Don't panic about inflation

Moreover, some are overreacting to the inflation news. It's true that the jump was the largest in more than a decade. But the month featured some unusual aspects:

  • Prices of used cars and trucks jumped 10%, as disruptions to new-car sales from semiconductor chip shortages boosted demand for alternative transportation.
  • Travel-related costs soared. "Lodging away from home" saw prices rise 7.6%, while airline fares skyrocketed 10.2%. Car and truck rental costs jumped 16.2%.

That's not to say the news was all so easily dismissed. Food costs were up 0.4%, with costs of dining out jumping 3.8%. Inflation numbers might have been higher had it not been for a short lull in rising gasoline prices, which helped the energy index fall 0.1% during April.

The economy has seen unprecedented disruptions, and it's natural that prices are going to go through some perturbations to readjust to conditions slowly heading back toward normal. It's likely that many of these temporary jumps will reverse themselves once these short-term glitches work their way through the system.

It's hard to endure stock market drops, but it's easier when you know most investors are selling for the wrong reasons. If you own shares of strong companies, their true value will win out in the end.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,225.61 (-1.54%) $-458.13
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,640.47 (-2.11%) $-78.57
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,737.51 (-2.84%) $-314.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.