Inflation and the Fed once again are taking center stage for investors. First, were signs of wages inflation being hotter than expected last Friday. Next comes an unwelcome increase in the Producer Price Index this Friday.
These are signs of “sticky inflation”. The kind that doesn’t fade so easy. The kind the Fed warned us about.
Oddly traders tried to shrug off the early losses this Friday…but came to their senses by selling with gusto into the close.
Let’s ponder why that is the case, along with the broader investment outlook, in this week’s commentary below…
In my last commentary I discussed the catalysts at play for investors. Both the factors that cause bullish rallies as well as bearish drops.
The nutshell version of the article is to appreciate that the key ingredient for stock prices is the state of inflation and therefore how long the Fed will have to remain hawkish. The longer inflation stays around…the longer the Fed has high rates…the more likely to have recession and lower stock prices.
Most investors talk about the Consumer Price Index (CPI) when discussing inflation. However, the leading indicator of where that will be in the future is the related, Produce Price Index (PPI).
That’s because this report reviews the costs being taken in by companies now, that will show up as higher prices for their products and services down the road. Now you appreciate why the higher than expected reading for PPI Friday morning was not a welcome sign leading S&P 500 (SPY) futures to immediately drop from +0.5% to -0.5%…and then closing at -0.73% on the session.
What should really jump off the page for investors is to appreciate that the +0.3% month over month increase in PPI came at the same time that gasoline prices were down a full 6%. This is exactly what the Fed fears…that inflation is becoming “sticky” in other places.
Meaning more permanent. Meaning higher rates from the Fed on the way. Meaning still a long term battle to fight inflation which increases odds of hard landing (recession). And yes, meaning lower corporate earnings which begets lower stock prices.
Now let’s remember that on Friday 12/5 we learned in the Government Employment report that wage inflation was higher than expected. And wage inflation is about the stickiest category.
The release of that information had stock futures down about -1.5% at the time of the open. Oddly bulls kept bidding up stocks into the finish to a nearly breakeven result.
Over the weekend investors sobered up to the realization that this news was indeed quite bearish. That is why stocks trimmed over 3% in the first 3 sessions of the week.
This action is somewhat similar to the reaction to PPI this Friday morning. Stock futures dropped like a rock on the news. But somehow fought their way back until the final hour when the bears took the wheel.
Perhaps that is because some traders don’t fully appreciate that PPI is the leading indicator for the more widely followed CPI report which comes out Tuesday 12/13. Perhaps they want to roll the dice and see what happens there.
Or perhaps they want to wait for the next Fed rate decision on Wednesday 12/14. Let me remind investors that what happened at the last meeting. They foolishly rallied 2% within minutes of the announcement that future rate hikes would be lower.
However, when Powell took to the podium thirty minutes later, he reminded folks of the long term battle ahead. And the odds of creating a soft landing for the economy had greatly diminished. That speech turned that 2% rally all the way down to a -2.5% finish on session.
Long story short, investors can stay bullish if they want rolling the dice on what is in the 12/13 CPI report or 12/14 Fed announcement. However, when you pull back and look at the entirety of what is going on, which is what I did in my “2023 Stock Market Outlook”, then you will appreciate that odds still point firmly to recession forming early next year with lower lows on the way for stock prices.
What To Do Next?
Watch my brand new presentation: “2023 Stock Market Outlook” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- 5 Warnings Signs the Bear Returns in Early 2023
- 8 Trades to Profit on the Way Down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
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Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares fell $0.43 (-0.11%) in after-hours trading Friday. Year-to-date, SPY has declined -16.24%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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