Unwrapping the Two Big Inflation Reports This Week | Editor’s Note: Before we dive into today's Market 360, I wanted to remind you that the markets will be closed on Monday, January 15, for the Martin Luther King Jr. holiday. Likewise, the InvestorPlace offices and customer service department will be closed. Enjoy the long holiday! | | | Hello, Reader. My favorite time of year – earnings season – kicked off with the big banks on Friday. While we will spend plenty of time pouring through those results over the next few weeks, there are two big inflation reports I want to draw your attention to today: the latest Consumer Price Index (CPI) and Producer Price Index (PPI).
These reports will help the Federal Reserve determine when it should start cutting key interest rates. And that, in turn, will set the tone for how investors feel about 2024. So, it’s important that we take some time to review.
The short version is that the CPI was a buzzkill while the PPI was fantastic. So, in today’s Market 360 , let’s dive into the details of each report, what they mean for the Federal Reserve’s next steps… and how to best position your portfolio to profit in the current economic environment.
Let’s get started. The Consumer Price Index (CPI) Disappoints On Thursday, the Labor Department released the CPI reading for December. And, as I said, it was a buzzkill.
Prices rose 0.3% in December, which was higher than the 0.2% in November and economists’ estimates for a 0.2% increase. On an annual basis, prices were up 3.4% in the past 12 months, which is up from 3.1% in November.
Core CPI, which excludes food and energy prices, rose 0.3% in December, which is the same as November. On an annual basis, core CPI was up 3.9% in the past 12 months. Economists were expecting a 3.8% increase.
Although the CPI and core CPI were only slightly above economists’ expectations, the real problem I had was with the components of the report.
Owners’ Equivalent Rent (shelter costs) surged 0.5% in December and accounted for much of the CPI increase. The other surprises were that medical costs rose 0.7%, used vehicles rose 0.5%, and electricity rose 1.3%.
Not good, folks.
Overall, the CPI report was disappointing, especially Owners’ Equivalent Rent, which has risen 6.2% in the past 12 months and remains stubbornly high. This CPI report was surprising to me, since the price of goods have softened due to the fact that supply chains disruptions have ceased. Plus, there is lackluster demand for many goods, such as appliances.
Producer Price Index (PPI) Signals Deflation Ahead But on Friday, I was singing a different tune. That’s because the PPI numbers for December were released and showed wholesale prices are falling.
Prices declined 0.1% in December, compared to economist expectations for a gain of 0.1%. On a yearly basis, producer prices were up 1%. This is the third-straight monthly decline for the PPI, which is significant because it means we’re seeing deflation at the wholesale level.
The core PPI, excluding food, energy and trade margins, rose 0.2% in December and rose 2.5% in the past 12 months. Wholesale food declined 0.9% in December. Interestingly, wholesale service costs rose 0.4% in December, while the prices for goods declined 0.6%.
Overall, the December PPI data was significantly lower than economists’ consensus expectation.
Now, what’s important to understand about the latest PPI report is that it shows that the U.S. is importing deflation from the rest of the world, most notably China.
China recently reported that its consumer prices declined 0.3% in December, which is its third-straight monthly decline. Deflation is unquestionably enveloping the Chinese economy and it is being exported around the world, which partially explains why wholesale goods prices declined 0.6% in the December PPI report.
Looking ahead, the next big inflation report will be the Personal Consumption Expenditure (PCE) data or December, which will be released on Friday, January 26.
This is the Fed’s preferred inflation indicator, and it measures the change in goods and services consumed by all households. The Fed wants to see the “core” number (which removes food and energy) decline to 2% on an annual basis.
But here’s the thing... the core PCE in the past six months is running at a 1.9% annual pace, so the Fed’s 2% inflation target is already within sight. If they don’t begin cutting rates soon, it’s not inflation that will be the concern… but rather deflation.
Deflation is when prices fall. This is typically a good thing, but the problem is that if prices fall too far, too fast, the economy can slip into a recession. Luckily, the Federal Reserve can stop deflation by cutting key interest rates. So, the December PPI report puts pressure on the Fed to cut rates sooner rather than later. When the CPI numbers came out, it looked like the pressure was off the Fed – and that’s what made me so frustrated. Investing During Times of Uncertainty Now, in times of uncertainty, the market can turn a bit manic and experience wide swings. So, if you want to protect your portfolio, you need to diversify it with fundamentally superior stocks. In other words, you want to own stocks that “zig” when others “zag.”
The best bets along these lines right now are energy stocks. Especially if you have a lot of tech stocks – as they tend to behave differently. On a day like yesterday, for example, the Energy Select Sector SPDR Fund (XLE), which tracks energy stocks, was up 1.1%, while the Invesco QQQ Trust (QQQ), which tracks tech stocks, was up just 0.05%.
The XLE also outperformed the S&P 500, Dow, NASDAQ and Russell 2000 on Friday. The S&P 500 and NASDAQ gained 0.08% and 0.02%, respectively, while the Dow and Russell 2000 fell 0.31% and 0.23%, respectively.
The reality is energy stocks are also well-positioned to prosper in the current environment. The U.S. dominates natural gas production and also has record crude oil production. The U.S. has also been exporting more and more natural gas and crude oil around the world, and that’s good news for energy investors.
In addition, Middle East is a tinderbox and extremely unpredictable, which also bodes well for fundamentally superior energy stocks. I would not be surprised if during the next flareup in the Middle East if crude oil prices hit $80 per barrel.
The bottom line: Energy and energy-related stocks are a great way to hedge your portfolio, which is why I recommend the crème de la crème of energy stocks in Growth Investor.
The energy companies I recommend in Growth Investor are great holdings that will “zig” when others “zag.” That can free you up to aim for big gains with tech stocks, like with what we’ve seen with names like NVIDIA Corporation (NVDA) and others at the forefront of the AI boom.
So, if you want to take full advantage, you can apply my “Billion Dollar Tech Blueprint” to the AI market and turbocharge your portfolio – even if you only have a few hundred dollars to start with.
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Sincerely, |
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