We have all been worried about what high inflation will do to the economy and stock market. And yet on Thursday inflation spiked again, yet amazingly the S&P 500 (SPY) had a great session. Investment veteran Steve Reitmeister shares the reasons why in his new market outlook with trading plan and top picks. Read on below for more.
Going back to early 2022 we understood a very important investment reflex. To sell stocks when headlines pointed to higher inflation…and to buy stocks when the news spoke of lower inflation.
So why on earth did stocks have a gangbuster rally Thursday as the month over month PPI reading nearly doubled?
We will dive below the surface to show the wisdom of that move. Plus, more details as to why the bull market story is well intact.
Let’s take a step back to remember that we have been operating in a volatile trading range since the end of July. The 5 month rally towards 4,600 on the S&P 500 (SPY) was overheated and overdue for a round of profit taking.
From there we took saw a very typical 5% pullback for the overall market. However, many of the stocks that led the rally saw even stiffer losses.
This trading range scenario has us very vulnerable to every headline, which explains the helter-skelter day by day results. Yet overall, the general bullish thesis for stocks is not lost…just faded to the background for the time being.
With that understanding in place you can appreciate why most investors were very keen on what the monthly CPI and PPI inflation reports predicted about future Fed actions. First came CPI on Wednesday where the yearly Core Inflation rate continues to come down (4.3% vs. 4.7%).
However, some did flinch on the tripling of the monthly non-core rate from 0.2% to 0.6%. So even though the S&P 500 ended in the plus column, most appreciate it was a Risk Off session with small caps taking a bit of a beating.
Flash forward to Thursday where the PPI report showed an even more explosive 0.7% month over month increase (greater than 8% annualized pace). One might suspect that stocks would implode on that news because of this frequently appreciated chain reaction:
Higher inflation > Fed raises rates more > Increases odds of recession > Stocks go DOWN!
Gladly investors could see that the only reason for the rise in PPI was a 1 month spike in oil prices. Tose moves are often very transient. That is why the Fed likes to focus on core inflation figures which removes the volatility in food & energy.
There we see a much more subdued +2.2% year over year inflation pace which is getting us ever closer to that 2% Fed target. This led to a reduction in the likelihood of another Fed Rate hike this year.
Right now, investors place 97% odds of the Fed standing pat at their upcoming meeting on Wednesday September 20th. However, it was always the November meeting that was the bigger question mark.
Going back a week ago investors placed 47% odds of a rate hike taking place in November. Thanks to the CPI and PPI reports this week, that is now down to only 36% odds.
Now let’s flip the above chain reaction around to appreciate the bullish version:
Lower inflation > Fed stops raising rates > And soon lower rates > Decreases odds of recession > Stocks go UP!
And as shared in my last commentary, Goldman Sachs has decreased the odds of recession to only 15%. Note that the starting assumption by economists and market strategist is that 10% odds is true even during the best of times.
Thus, it means they see very few things right now that lead to a recession…and thus recommending that investors prepare for more stock market upside ahead. I feel the same way.
Outlook and Trading Plan
The fundamentally bullish story was shared above. The technical version is that we can barely remember the last time that stocks flirted with the long term trend line of the 200 day moving average (now at 4,179).
Add that all up and it says it’s wise to be bullish and use the dips in this trading range to add more quality stocks.
Like which ones?
Read on below for some of my top ideas.
What To Do Next?
Discover my current portfolio of 7 stocks packed to the brim with the outperforming benefits found in our POWR Ratings model.
Plus, I have added 4 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.
This is all based on my 43 years of investing experience seeing bull markets…bear markets…and everything between.
If you are curious to learn more, and want to see these 11 hand selected trades, then please click the link below to get started now.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares rose $0.13 (+0.03%) in after-hours trading Friday. Year-to-date, SPY has gained 16.81%, versus a % rise in the benchmark S&P 500 index during 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 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.