Key points to remember
- Headline inflation in December fell to 6.5% from 7.1% in November on an annual basis. Although this information is not really worth celebrating, it is a sign that things are moving in the right direction since it shows that rate hikes are slowing the economy.
- Investors watch the CPI data because if inflation drops, hopefully the Fed will slow down with the aggressive rate hikes that have made the cost of borrowing more expensive.
- With inflation numbers falling and jobs being added to the economy last month, we now have to wait and see how the Fed reacts in February at the next FOMC meeting, where many analysts expect to a rate hike of 0.25%.
The most recent Consumer Price Index (CPI) data came out last Thursday and immediately had an impact on the stock market. The December CPI report showed that headline inflation fell 0.1% and the inflation rate on an annual basis was 6.5%. Even though inflation rate cools, a celebration is still too premature as we need to see how the Fed reacts to all this data. Further rate hikes could be on the horizon.
We’ll look at what recent CPI inflation data says about the state of the economy today and what that means for the stock market going forward, and how leverage Q.ai to help.
What is the current state of the economy?
The most recent CPI inflation data reported that rate hikes are finally slowing the economy, with inflation standing at 6.5% in December on an annual basis from 7.1% in November. While the headline inflation rate was down 0.1% from November, headline prices still rose 6.5% on an annual basis. Core CPI, which excludes volatile items like food and energy, rose 0.3%, which analysts expected.
Prices are finally starting to fall after the post-pandemic boom. When the world began to open up, there was an unprecedented increase in demand that could not be matched by supply in the economy. Pent-up consumer demand for a return to normal, supply chain issues and a tight jobs market have driven up prices for everything. Consumers started noticing that inflation was hurting their purchasing power, but the seriousness of the situation didn’t become apparent until early 2022.
At first, central banks concluded that inflation was transitory due to the unique circumstances. Then it finally became clear that inflation was skyrocketing and that rate hikes needed to start restoring the balance between supply and demand to a reasonable level. Analysts have been paying attention to labor market and CPI data to see how the economy is responding to aggressive rate hikes.
It should be noted that the inflation data was released after the Department of Labor reported that the US economy added 223,000 jobs in December, above economists’ forecast of 200,000. The department also said reported that salaries had increased by 4.6% on an annual basis in December, but with inflation so high, employees did not see these salary increases as a net gain in their purchasing power.
The CPI data for December is positive news in the sense that we are probably done with the peak of inflation. However, we now have to worry about the reaction of the Fed since we are far from the inflation target of 2%. That means future rate hikes could be smaller, but there’s no way to tell how the stock market will react to the next FOMC announcement.
What was the impact of the inflation report on the stock market?
The stock market typically reacts to inflation data before it is released based on analyst forecasts, and then the market reacts again once the official results are released. The Inflation Report came out on the morning of January 12 and stocks closed higher after news of slowing inflation for December.
Here are some of the major stock market highlights as of the close on Inflation Report Day on January 12:
- The Dow Jones Industrial Average rose 0.64% gaining 216.96 points
- The S&P 500 rose 0.34% to end the trading day at 3,983.17
- The Nasdaq Composite rose 0.64% to 11,001.10
It should be noted that this was the first 5-day winning streak for the tech sector since July, as this part of the market has suffered lately. Investors reacted positively to the inflation data because if prices go down, it could probably cause the Fed to slow down with rate hikes, which would help us avoid entering a recession in 2023 (at best). case).
What does this information mean for the stock market?
Inflation data directly impact the stock market because consumer spending and income are tied to inflation data. When consumers spend less money on goods and services, businesses report lower earnings, which hurts stock prices. When stock prices fall, it hurts investor confidence. In this case of the most recent data, investors saw it as a sign that inflation might finally be slowing and rate hikes might slow. The combination of lower inflation and halted rate hikes could indicate that consumer spending will return to normal.
In times of high inflation and rising rates, growth stocks and companies offering discretionary products fall dramatically. If consumers fear that prices are too high or that we may enter a recession, they will be less inclined to spend money on items that are not considered essential.
What future for the stock market?
Inflation data and the labor report have both been announced for December 2022. The next step is to see how the Fed will react to what is announced at the next FOMC meeting, which is scheduled for January 31. and February 1. There are two key factors to consider when it comes to inflation and stock market data.
Earnings reporting season begins
It’s around this time of year that companies will begin announcing their results for the fourth quarter of 2022. As we’ve covered extensively in previous material, many companies had been warning investors of lower earnings during the holiday season due to a change in consumer habits. With inflation soaring and fears of a recession, many companies expected lower profits.
As earnings reports come out, we’ll see how the stock market reacts to the weaker numbers. While lower earnings are to be expected, that doesn’t mean investors won’t be quick to start selling stocks again. Further stock market selloffs based on weaker earnings reports would drive the market lower at a time when there have been signs of a slow recovery.
Fears of a recession still hang over us
The possibility of a recession is still not out of the question. As the Fed continues to raise rates to slow inflation, there is always the possibility of tipping the entire economy into a recession. While many pundits were expecting an announcement that the US economy has officially been in a recession for about 6 months now, the National Bureau of Economic Research (NBER) has decided that we are not officially in a recession yet.
If rate hikes succeed in pushing the economy into a recession, we will see further sell-offs in equity markets, and there is no telling how much the market might fall as investors tend to hoard cash. during a recession for fear of losing their jobs. .
How should you invest?
Trying to decide which stocks to invest in can be daunting at the best of times. When inflation soars and central banks respond with rate hikes, there is a lot of volatility in the stock market that makes it stressful to be an investor.
If you are concerned about investing in times of high inflation, we suggest you consult Q.ai inflation kit. We use the power of AI to predict and adjust positions in this diversified portfolio of assets designed to mitigate the risks of rising inflation. You can also activate Wallet Protection to better protect your money during periods of high market volatility.
The bottom line
Although inflation peaked year over year in June when it reached 9.1%, we are still far from the target rate of 2%. This means that we may still see volatility in the stock market as the economy continues to react to rate hikes and CPI data. All we can do for now is monitor the situation to see how the economy reacts.
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