Stock Investors in a “Sticky” Situation
Because inflation is too “sticky”, the S&P 500 (SPY), has been losing weight for weeks. What does this mean? Why is that important? Steve Reitmeister, a 40-year investment veteran, explains it all in this timely commentary. It includes market outlook and trading plan as well as top picks. Continue reading for the complete story.
Investors are once again focusing on inflation and the Fed. First, there were signs that wages inflation was hotter than expected last Friday. Next, there was an unexpected increase in the Producer Price Index on Friday.
These are the signs of “Sticky inflation“. The kind that doesn’t fade so easily. The Fed warned us about.
Odd traders tried to ignore the losses early Friday, but they came to their senses and sold with gusto until the end.
Let’s consider why this is so, and what the investment outlook looks like. You can find the commentary below.
In my last commentary I discussed the catalysts that investors need to consider. Both the factors that cause bullish rallies and bearish falls.
In a nutshell, the article explains that stock prices are determined by the Fed’s inflation rate and how long it will remain hawkish. The Fed will have higher rates for longer periods of inflation, which means that stock prices will be more likely to fall and recession is more likely.
When discussing inflation, most investors refer to the Consumer Price Index (CPI). The Produce Price Index (PPI) is the best indicator of where it will be in the future.
This is because the report examines the costs companies are taking in now. It will then show up as higher prices for products and services later on. You now understand why Friday’s unexpectedly high reading for PPI Friday morning did not bode well for S&P 500 (SPY), causing futures to drop immediately from 0.5% down to -0.5 and then closing at -0.73%.
Investors should be able to see that the 0.3% increase in PPI month-over-month occurred at the same moment that gasoline prices fell a full 6 percent. This is exactly what the Fed fears…that inflation will increase.Sticky“In other places.
More permanent. Higher rates from the Fed are on the horizon. It means that there is still a long-term battle to combat inflation, which increases the odds of a hard landing (recession). Yes, lower corporate earnings means lower stock prices.
Let’s not forget that the Government Employment Report on Friday 12/5 revealed that wage inflation was higher that expected. Wage inflation is the most stubborn category.
Stock futures were down by -1.5% after the release of this information. Oddly, bulls continued to bid up stocks until the end to almost breakeven.
Investors woke up this weekend to realize that the news was very bearish. Stocks fell by more than 3% during the first three sessions of the week.
This is a similar reaction to Friday’s PPI news. Stock futures fell like a rock when the news broke. They managed to fight their way back up until the last hour, when the bears took over the wheel.
It could be that traders don’t realize that PPI is the leading indicator of the more widely read CPI report, which is out Tuesday 12/13. They might just want to play the dice and see what happens.
Or they may want to wait until the Fed rate decision on Wednesday, 12/14. Investors should remember what happened at the last meeting. They foolishly rallied by 2% within minutes of the announcement about future rate increases being lower.
But Powell returned to the podium 30 minutes later and reminded people of the long-term battle ahead. The odds of a soft landing for America’s economy were greatly reduced. The speech brought the 2% rally to a -2.5% close to the session.
Investors can remain bullish if they wish to gamble on the 12/13 CPI report and the 12/14 Fed announcement. If you look at the whole picture, which I did in my “2023 Stock Market Outlook”, you’ll see that the odds are still in favor of a recession starting early next year, with stock prices falling to lower levels.
What should you do next?
Check out my brand new presentation:2023 Stock Market Outlook” covering:
- Why 2023 is a good choice “Jekyll & Hyde” Stocks year
- Five Warning Signs that the Bear Returns in 2023
- 8 Trades to Make Profit on the Way Down
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- 2 Trades with 100% upside potential as a New Bull Emerges
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We wish you success in your investment endeavors!
Steve Reitmeister…but everyone calls my Reity (pronounced “Righty”)
CEO, Stock News Network Editor, Reitmeister Total Return
SPY shares dropped $0.43 (-0.11%), in after-hours trades Friday. SPY shares have declined by -16.24% year-to-date compared to a % increase in the benchmark S&P 500 index over the same period.
About the Author: Steve Reitmeister
StockNews readers know Steve as “Reity”. He is the CEO of the firm and shares his 40 years of experience in investment with the audience. Portfolio Reitmeister Total Return. Find out more about Reity’s history, including links to his most recent articles.