The S&P 500 (SPY) has been down all week as inflation looks too “sticky”. What does that mean? And why does it matter? 40 year investment veteran Steve Reitmeister lays it all out in this timely commentary featuring market outlook, trading plan and top picks. Read on below for the full story.
Inflation and the Fed are once again at the center of attention for investors. First, there were signs last Friday that wage inflation was hotter than expected. Next comes an unwelcome rise in the producer price index this Friday.
These are signs of “sticky inflation”. The kind that doesn’t fade so easily. The kind the Fed warned us about.
Oddly enough, this Friday traders tried to shake off early losses…but came to their senses by selling with gusto to the end.
Let’s reflect on why that is the case, along with the broader investment outlook, in this week’s commentary below…
In my last comment I discussed the catalysts at play for investors. Both the factors driving bullish rallies and bearish drops.
The nutshell version of the article is to realize that the key ingredient to stock prices is the state of inflation and thus how long the Fed will have to remain hawkish. The longer inflation lasts… the longer the Fed maintains high rates… the greater the likelihood of a recession and lower stock prices.
Most investors talk about the consumer price index (CPI) when they talk about 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 assesses the costs companies charge now, which will later be reflected in higher prices for their products and services. Now you can understand why the higher-than-expected value for PPI Friday morning was not a welcome sign, causing S&P 500 (SPY) futures to instantly drop from +0.5% to -0.5%…and then close at -0, 73% during the session.
What should really jump off the page for investors is to realize that the +0.3% month-over-month increase in PPI came at the same time as gas prices fell by as much as 6%. This is exactly what the Fed is afraid of… that inflation is getting worse.”sticky” in other places.
Means more permanent. That means higher rates from the Fed down the road. This still means a protracted battle to fight inflation, which increases the likelihood of a hard landing (recession). And yes, that means lower corporate profits, which leads to lower stock prices.
Now, let’s not forget that on Friday, 5/12, we learned in the Government Employment Report that wage inflation was higher than expected. And wage inflation is just about the trickiest category.
The release of that information caused equity futures to fall about -1.5% at the time of opening. Oddly enough, bulls continued to bid stocks all the way to a near break-even result.
Over the weekend, investors sobered up to the realization that this news was indeed quite bearish. Therefore, shares fell more than 3% in the first 3 sessions of the week.
This action is somewhat similar to the reaction to PPI this Friday morning. Stock futures fell like a brick on the news. But somehow they fought their way back until the final hour when the bears took over.
Perhaps that’s because some traders don’t fully realize that PPI is the leading indicator for the more widely followed CPI report due out Tuesday 12/13. Maybe they want to roll the dice and see what happens there.
Or maybe they want to wait for the Fed’s next interest rate decision on Wednesday 12/14. Let me remind investors what happened at the last meeting. They foolishly gained 2% within minutes of announcing that future rate hikes would be lower.
However, when Powell took the stage thirty minutes later, he reminded people of the long-term battle ahead. And the chances of a soft landing for the economy had diminished sharply. That speech completely turned that 2% rally into a -2.5% finish during the session.
Long story short, investors can remain optimistic if they want to roll the dice on what’s in the 12/13 CPI report or 12/14 Fed announcement. However, if you step back and look at the whole of what’s going on, which is what I did in my “Stock Market Outlook 2023,” you’ll understand that the odds are still firmly pointing to a recession forming early next year with lower lows down the road for stock prices.
What to do now?
Check out my brand new presentation: “Stock market outlook for 2023” covering:
- Why 2023 a “Jekyll & Hyde” year for shares
- 5 warnings indicate the bear will return in early 2023
- 8 trades to make a profit on the way down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ upside potential as new bull emerges
- And much more!
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
SPY shares fell $0.43 (-0.11%) in after-hours trading on Friday. Year-to-date, SPY is down -16.24%, versus a percentage increase in the benchmark S&P 500 index over 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 company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.