Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Stephanie Link of Hightower

Portfolio > Economy & Markets > Economic Trends

Stocks Soar on Cool Inflation Reading, but Does This Rally Have Staying Power?

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • The stock market saw a big rally on Thursday after the Labor Department released its Consumer Price Index for October.
  • Even with the lower-than-expected CPI reading, 2023 is still highly likely to see slower growth.
  • Whether or not there is a recession, it's important to keep a close eye on what is happening below the surface.

Last week, we were again reminded how closely investors are watching inflation reports for signs of a peak, which could mean a Federal Reserve pivot in the near future — or so they hope.

We saw a major rally across the board on Thursday — with the S&P 500 seeing its best day since 2020 and the Dow Jones Industrial Average jumping 1,200 points — after the Labor Department released its Consumer Price Index (CPI) for October, which rose a less-than-expected 7.7%.

The news capped another up-and-down week, where we saw the market climb leading up to Election Day on expectations for a gridlocked Congress, but we are still awaiting final results. This time period of heading into the holiday season, post-Election Day, has historically been strong for stocks.

However, even with Thursday’s cooler-than-expected CPI reading for October, we expect to close out this year in the same choppy trading range we are now getting used to against the backdrop of persistent uncertainty, a tight labor market and elevated inflation.

Though the Fed’s latest rate hike in November was no surprise, it appeared to give off some dovish tones in its policy statement, acknowledging it would consider the lag effects of all its rate hikes on the economy when making future policy decisions. (Remember, it typically takes six to nine months to feel the effects of a rate hike and other policy moves.) But Fed Chair Jerome Powell struck a more hawkish tone during his press conference. The major takeaway was that we can expect higher rates for longer.

Where does this leave us? We have been talking about this for a long time. Yes, 2023 is highly likely to see slower growth — because that is what the Fed is working to engineer. Will it be a full-blown recession? Or will it be more of a shift to a slower pace of growth? Nobody knows for certain, but we do know that a slowdown is coming.

While I do see opportunity in this market environment, the recent choppy trading range with big fleeting swings on any given inflation report is likely to continue through to the end of the year. With that in mind, between now and the holidays, I am bullish on value stocks — energy, financials, materials, industrials and health care — over growth equities.

Mixed Signals

Let’s look at the jobs front to better understand Powell’s hawkish tone. Nonfarm payrolls grew by 261,000 in October, better than the estimate for 205,000, plus we got higher revisions for prior months.

On top of that, last week the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) reported an increase to 10.7 million open jobs in September, from a revised 10.3 million a month earlier. The median estimate was 9.8 million. This means right now there are more job openings than unemployed people.

Weekly initial jobless claims, a forward-looking indicator, also remain at or near historic low levels. Any way you slice and dice these numbers, the job market remains strong. This one part of the mandate that the Fed is looking at doesn’t seem to show an immediate need to slow the tightening.

Conversely, the inflation front has been stubbornly persistent, as everyone is watching closely for any sign of a peak that could begin to tame the Fed. On Thursday, October’s CPI report seemed to offer a first glimmer of hope, as the widely watched index rose less than expected last month — and the report showed the lowest annual increase for consumer prices since January.

But we may not be out of the woods yet. While October CPI came in at a cooler-than-expected 7.7%, year over year, it is still nowhere near the Federal Reserve’s target rate of 2%. Looking at other recent inflation data, the Employment Cost Index, the broadest measure of labor costs, was up 5.0% in the third quarter, year over year.

Meanwhile, the core personal consumption expenditures price index, the Fed’s preferred inflation gauge, climbed at a 5.1% annual pace in September. This climb from August’s 4.9% annual pace marks the second straight month of increases in the annual pace for the core PCE index and brings it back to its highest rate since March.

At the same time, West Texas Intermediate crude oil continues to hover around the $90 level. I believe the market may be signaling something here, and we need to keep an eye on it. Does it have to do with China reopening plans? Of course, nobody knows. There has been much speculation on when China will reopen and, until it does, it all remains speculative. But if and when that happens, inflation only goes higher.

How I’m Investing Right Now

Will there be a recession in 2023? We don’t have a crystal ball, but we expect to hear this conversation over and over again. It is important to keep a close eye on what is happening below the surface and not to respond to every big swing that follows a new inflation reading.

There are parts of the market that have been doing better than the headlines suggest — and that is where I continue to focus right now. The real story is the underlying rotation, as we have seen a massive rotation in the market to value from growth. And the cuts to growth, of course, have been most pronounced in the technology sector, and these stocks are still vulnerable to a potential “higher rates for longer” new normal ahead.

In this environment, I remain more bullish on value versus growth and on cyclical versus defensive. I am heading into the end of the year overweight on energy, financials, industrials and materials, while underweight on technology and communications services.

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower Advisors LLC. She leads the firm’s Investment Solutions Group. Follow Stephanie on LinkedIn and Twitter @Stephanie_Link. Read her regular market insights here.

Securities offered through Hightower Securities LLC, member FINRA/SIPC. Hightower Advisors LLC is an SEC-registered investment advisor.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.