Peak Inflation and the Stock Market Outlook
The yield curve is no longer inverted, but inflation continues to rage higher as proven by the 11.2% reading for PPI today. However, this is a growing chorus of market commentators who see signs of “peak inflation” which means lower inflation ahead and potentially an all clear signal for the stock market (SPY). If only it were that easy. So let’s discuss what we know at this time leading to the best investment strategies to navigate these choppy waters in the weeks and months ahead.
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(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
The market consolidation and sector rotation stays in place. With that is range bound trading…but don’t confuse that for calm markets. We still endure violent volatility day to day and group by group.
2 trends continue to pay the bills: Energy and rising rate trades. We have aggressively overweighted each and enjoying the rewards as our portfolio is in positive territory on the year. But that doesn’t mean that everything is rainbows and lollipops.
So let’s dig in with the latest information to appreciate future market direction including the growing narrative that we are reaching “peak inflation”.
Last week’s commentary (Bear Market Scare?: The Inverted Yield Curve) is a vital starting point for this week’s conversation. So make sure that you read it first and then move on with the additional insights below.
The first thing to point out is that the yield curve is still not inverted at this moment. In fact, the spread has widened nicely since the beginning of the month: 2.365% for 2 year vs. 2.703% for 10 year.
Next is the ideas confirmed in the FOMC Minutes from last week pointing out their aggressive plans to unwind more and more of their $9 Trillion (yes, Trillion) balance sheet of positions. And they will do that $90 billion a month for the foreseeable future.
This increased supply of Treasury bonds sold by the Fed will require higher rates to entice new buyers to snap them up given the state of inflation. And thus the inverted yield curve scare will fade more and more into the distance as the Fed releases more and more bonds into the market and longer term Treasury rates go higher and higher. This is clearly a positive for our 2 direct trades on higher rates and for the regional banks (3 tickers reserved for Reitmeister Total Return members…learn more about these trades here >).
So the idea that there is a recession warning out there from an inverted yield curve is becoming less and less valid. But indeed inflation is still high as proven by the CPI and PPI reports this week.
Now let’s transition to the related topic of peak inflation. There is now a growing number of Market Strategist claiming that inflation is likely topping out and thus heading lower in the future.
That was hard to see in the 11.2% year over year reading for PPI this morning. However, the economists who focus on these topics point to there being an artificial dip in prices last spring/summer that is making inflation look obscenely high now that will fade away. And when it does, then we will see rates moderate.
Just as you are breathing a sigh of relief, unfortunately, the next hoop to jump through is the GREAT HOPE that the Fed sees these signals clearly and does not overly remove accommodation (raise rates) and thus harm the economy. Yes, it is true that the Fed has a poor track record on this front. But since these folks are indeed students of history…then likely they have learned lessons from the past that will hopefully lead to better decisions this time around.
Hope is not a strategy which explains why investors are stuck between the highs of the year and the lows. The more proof that the Fed gets it right, and the economy continues to roll higher, the sooner will break higher.
Conversely, if there are growing signs of economic damage from high inflation, then the more likely stocks will revisit the recent lows…and maybe lower.
Sorry that the pathway is not clearer…but economics is a soft science. Meaning its inexact. And thus its correlation to the future of stock prices is also not clear.
That is why we are leaning into the trends that are paying the bills (energy and rising rates trades). Staying away from industries harmed by higher rates and higher energy prices (home building, autos, trucking etc). And altogether staying nimble to move our portfolio more aggressive or conservative as will be necessary.
What To Do Next?
Discover my “Lucky 13 Trades” inside the Reitmeister Total Return portfolio that are perfect for this hectic market environment.
Note this newsletter service firmly beat the market last year. And actually in positive territory in 2022 as most other investors are enduring heavy losses.
How is that possible?
The clue is right there in the name: Reitmeister Total Return
Meaning this service was built to find positive returns in all market environments. Not just when the bull is running full steam ahead. Heck, anyone can profit in that environment.
Yet when stocks are trending sideways, or even worse, heading lower…then you need to employ a different set of strategies to be successful.
Come discover what 40 years of investing experience can do you for you.
Plus get immediate access to my full portfolio including the current “Lucky 13 Trades” that are primed to excel in this unique market environment. (This includes 3 little known investments that actually profit from rising rates).
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 $0.23 (-0.05%) in after-hours trading Wednesday. Year-to-date, SPY has declined -6.37%, versus a % rise in the benchmark S&P 500 index during the same period.
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.