If Surging Inflation Triggers a Market Crash, History Says Investors Should Do This 1 Thing First

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Meanwhile, annual inflation was 3.7% for the year ending in September, well above the Federal Reserve's 2% target. Fed officials have started sounding alarms. Chicago Fed…

On Tuesday, the Bureau of Labor Statistics reported that consumer prices climbed by a higher-than-expected 0.4% in October. Meanwhile, annual inflation was 3.7% for the year ending in September, well above the Federal Reserve's 2% target.

Fed officials have started sounding alarms. Chicago Fed President Austan Goolsbee told PBS the data was "borderline disturbing," and said tariff-driven price pressure isn't fading as he expected. Fed Gov. Christopher Waller said a 50-basis-point (0.5%) hike should be considered in December.

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In the wake of these and other statements, CME's (NASDAQ:CME) FedWatch tool put the odds of a 25-basis-point hike at 86.8% on Wednesday, with the remaining 13.2% on a half-point move.

That's a notable shift. After three full years spent without raising rates, a December hike would be the Fed's second in four months. And with inflation proving stickier than the Fed had hoped, it may have to push rates much higher than markets expect. Stocks would have to compete with those higher yields, which could easily trigger a downturn or even a major crash.

But if such a crash happens, how should investors react? Here's what history says to do ... and what it says not to do.

It may sound counterintuitive, but the first thing investors should do in response to an inflation-triggered market crash is:

The temptation to get out before stocks fall further is strong. But selling once a crash has already begun usually means locking in your losses. Plus, investors who sell during a crash often wait until a recovery is clearly underway to get back in, and the market's biggest gains often come before the all-clear sounds.

Crashes caused by inflation don't usually look like the sharp, short-lived plunges of 2020's COVID…

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