December’s ‘very favorable’ inflation could signal the ‘final stage of a bear market’ and stave off a recession, experts say

Investors had been eagerly anticipating December’s consumer price index (CPI) data, but now that data has been released—the reaction is gone. The S&P traded just 0.6% higher as of midday Thursday after the Bureau of Labor Statistics (BLS) report Consumer prices fell 0.1% last month and year-on-year inflation fell to 6.5%.

The figures represent a marked decline from inflation over the past 40 years, which peaked at 9.1% in June, but they are also exactly what Wall Street is expecting. And core inflation — excluding volatile food and energy prices — rose 0.3 percent on the month and 5.7 percent year-over-year.

However, BMO Wealth Management’s chief investment strategist, Yung-Yu Ma, says Asset that it was “a very favorable report with moderate inflation in some areas.” And some experts say it signals the end of the bear market for stocks.

Gasoline prices fell 9.4% in December and were “by far the biggest contributor” to the overall drop in inflation, according to the BLS. Used car and truck prices also fell 2.5% last month and 8.8% year-on-year. And although travel is back this holiday season, airfares fell 3.1% in December. Food prices rose 10.4% year-over-year, but only 0.3% month-on-month. —slow from the 0.5% increase in November and the 1.1% increase in July.

Over the course of 2022, Fed officials raised interest rates seven times in an effort to bring inflation down to their 2% target, hoping to avoid triggering a recession in the process. The chairman of the central bank, Jerome Powell, famously described his goal as a sort of “soft landing” for the economy.

Ma argued that the latest report is an indication that Powell’s tactics are working, which could allow him to slow the pace of future rate hikes.

“This will soften the Fed’s tone at its next meeting and it reinforces our belief of a soft landing, where inflation falls but the labor market remains healthy and the economy remains strong,” he said. The economy will adjust to higher interest rates in the coming quarters.”

But Ma noted that several components of the consumer price index remained high in December, including hospital services and car insurance, among others. And BlackRock’s global head of fixed-income investments, Rick Rieder, said in a Thursday note that the CPI report shows inflation is “moderate,” but added a warning:

“Inflationary deflation is like dropping air out of a balloon; speed and shape can be difficult to predict,” he wrote. “Today’s numbers suggest that inflation, although improving, is evolving in a disproportionate manner and remains far (on a yearly basis) from the Federal Reserve’s target. state.”

The last gasps of the bear market – or is it all priced in?

With inflation plummeting over the past few months, some experts think the bear market – which saw the S&P 500 fall about 20% last year – may be coming to an end.

James Demmert, chief investment officer at Main Street Research, says Asset that he believes the latest inflation data is “supporting higher stock prices.” But Demmert also warned that the market could be volatile throughout the first quarter.

“We are in the final stages of a bear market – which can sometimes be the most painful,” he said. “This is often a period where the company’s results and earnings guidance disappoint.”

Demmert argues that investors’ focus will now be on earnings and that the bear market “could resolve itself this quarter.” The prevailing view on Wall Street is that the bear market may be in its final stages despite falling earnings per share (EPS). But Mike Wilson, chief investment officer of Morgan Stanley, warning this week about the possibility that the company’s EPS falls in the first quarter and causes the stock to drop 20%.

Demmert said he believes investors should “continue to be on the defensive, but also seize the opportunity.”

“Depending on this earnings season, investors could have a great opportunity to buy big companies that are doing poorly as the quarter and earnings season unfold,” he argues.

But some experts are advising caution. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says Asset that because December’s inflation report came out “exactly as expected,” the decline could have been largely anticipated by investors and priced into the market.

“A lot of this news is already priced in,” he said, arguing that the real question for investors is whether inflation will fall below the Fed’s 2% target level or whether it is stuck. stuck at a higher level or not. Zaccarelli believes many market participants are betting that inflation will continue to fall for the moment and that the economy won’t slip into recession.

“What kept us awake all night was whether a more negative outcome lies ahead,” he said, explaining that inflation could stay above 3 percent and a deep recession. more can still happen.

And Jason Pride, chief investment officer of Private Wealth in Glenmede, says Asset The probability of a recession remains “high” and that the Fed will need to maintain their restrictive policies to ensure that they do not repeat the mistakes of the past and that the “inflation scourge is extinguished.”

“Investors should be careful not to overstate these results and should moderate their expectations of an early rate cut from the Fed,” he warned. “Yearly core consumer inflation is still far from the Fed’s price stability target, and the 1970s provide a good case study of the risks of declaring victory over inflation too soon.”

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