“We’ve seen this before,” warns BofA. Why inflation could take until 2024 to drop to 3% and weigh on equities.

U.S. stocks edged higher on Thursday after October’s consumer price index showed inflation rising at a less positive annual rate than expected, stoking hopes that the Federal Reserve’s inflation flight The Federation may eventually make some progress.

But it’s probably still too early to rush into undervalued stocks, because the US economy is “less sensitive to a blunt instrument like rate hikes” than it used to be, analysts say. at BofA Global warned in a weekly client note.

Although still increasing, the monthly data willCPI down at 7.7% YoY, down from a high of 9.1% this summer. That lifted the mood on Wall Street, with the Dow Jones Industrial Average
+ 3.70%

take a shot increase more than 1,000 pointss and stocks headed for their best day on a percentage basis since 2020, according to Dow Jones Market Data.

However, the U.S. economy is not likely to respond quickly to sharply higher interest rates, in part because 95% of home loans are fixed-rate mortgages, consumers generally still have resilience with excess cash and unemployment remains low, according to BofA Global.

Furthermore, corporations have also raised plenty of low-cost fixed-rate financing during the pandemic, and the economy is currently being driven by the services sector, which is less sensitive to rate hikes. than in the manufactured goods sector.

A look back at history also suggests that inflation may take longer than expected (see chart) to return to a more normal level of around 3%. BofA’s team thinks that could happen by 2024.

The return to normal on the inflation front may take longer than expected

BofA Global Research, Bloomberg

“We have seen this before,” the BofA Global study wrote, in a November 8 report, adding that the period 1967-1980 was marked by “inflationary momentum” that led to only Consumer prices hit “a series of higher highs and higher lows,” as the energy crisis and wage inflation pushed prices higher.

While the team’s report came ahead of Thursday’s fresh inflation results, its warning was echoed elsewhere on Wall Street following the CPI report, with analysts and policymakers alike. policy reiterates that the Federal Reserve’s inflationary war is likely far from over.

See: Fed’s Daly, despite ‘welcome’ CPI data, still wants benchmark rate hike above 4.5%-4.75% range

Ryan Sweet, Chief US Economist at Oxford Economics, called the October CPI reading “slightly misleading” and it won’t stop the Fed from raising policy rates any further, in a note on Wednesday. Five.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said the result of slower inflation would likely be more necessary for the Fed to be confident about “delaying future rate hikes, which may happen.” out in the first quarter of next year if the data cooperates,” in an emailed commentary.

But the bigger risk for equity investors, he said, is from falling earnings and a broader recession in 2023.

BofA Global’s team has gone a step further, advising investors to “avoid growth stocks until valuations reset and inflation peaks,” but also end the year with cash in reserve. and use bear market rallies to pivot into energy and credit.

S&P 500 Index
+ 5.54%

rose 4.8% on Thursday, while the Nasdaq Composite Index
+ 5.54%

higher than 5.5%.


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