Stocks jumped on Thursday after a weaker-than-expected rise in the consumer price index dragged down bond yields and the U.S. dollar on hopes that the Federal Reserve could be less aggressive in its fight against the inflation. The Dow Jones Industrial Average rose more than 2.5%, the S&P 500 rose more than 4%, and the Nasdaq rose more than 5.5%. While encouraged by the strong rally, recouping Wednesday’s steep equity losses and more, we are hesitant to fully embrace this decision as a brutal turning point in the year for investors, fearing it could be a another short-lived bear market bounce. For our portfolio, we would have looked to use Thursday’s outsized gains to post profits had we not been constrained by our club rules, which you can read at the bottom of this story. It all started before Wall Street opened when October’s CPI headline came in at 7.7% yoy, while the base rate, which removes the impact of food and energy due to their volatile nature, came in at 6.3% versus a year ago. Both readings were below expectations by 7.9% and 6.5%, respectively. Under the hood, we saw monthly declines in energy services, used car and truck prices, and clothing. The October producer price index, which measures wholesale inflation, will be released next Tuesday. Given that the main focus of the stock market over the past year has been inflation and the Fed’s actions to rein it in, this move is not so surprising as it indicates that a major headwind could subside. We say “potentially” because a reading does not indicate a trend and we have already seen the inflation rate drop before bouncing back. However, with the layoffs starting to ramp up – mostly from Club holding Meta Platforms (META) – as well as this weaker retail inflation reading, we think we see the Fed’s aim to creating an environment that dampens demand is starting to show clear signs of success. The idea behind reducing demand is that it will result in lower inflation. It is certainly a reason to be optimistic and to support the idea that we have seen the lows of this brutal bear market. After all, falling bond yields support long-duration stocks, meaning those whose earnings streams are expected to materialize later in the future, essentially what people generally refer to as growth stocks. The 43% pre-CPI market odds for another 75 basis point rate hike in December fell to just under 20%, according to CME tool FedWatch. In addition, the drop in the dollar, which has been very strong this year, makes American goods more affordable for foreign buyers. Recall that exchange rate fluctuations have been a major headwind discussed throughout the earnings season by a number of companies operating internationally – both in terms of growth rates due to the dynamic conversion rates and buyer demand given the high cost of products in local currencies. However, in the face of this bullish view, we must remember that while we see what the Fed has been hoping for since it started to tighten, given the monetary policy lag effect, we still don’t know. how strict the conditions have become and what it is. resources for the economy. Will this lead to a so-called hard landing, characterized by a deep recession, or a soft landing, characterized by a relatively mild recession that includes no more destruction than necessary to defeat inflation. Given the uncertainty of what comes next, we are more inclined to sell in this rally than to pursue anything higher. We are also aware that, despite Thursday’s decision, many companies remain incredibly downcast and attractive as valuations are near multi-year lows. The bottom line is that, as positive as this latest CPI update is, headwinds remain. China remains stubborn on its zero-Covid policy. Russia is still at war with Ukraine. In addition, the dollar, despite its drop in print, remains close to the highest levels seen since the early 2000s. Inflation is still close to 40-year highs. Of course, to top it off, the monetary policy lag means we still don’t know how hard the economy will be hit by the most aggressive rate hike cycle we’ve ever seen. To be clear, the Fed is still expected to hike at least another 50 basis points at its December meeting, which would come after a fourth consecutive 75 in November, September, July and June, a 50 in May and a 25 in March. , which marked the first rate hike since 2018. All of this adds to significant uncertainty surrounding 2023 earnings estimates and the path ahead for the U.S. and global economy, which will determine how many investors ultimately feel going forward. comfortable placing on these estimates. Remember that the consideration of profits and multiples is what leads to price targets. (Jim Cramer’s Charitable Trust is a long META. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Traders work at the New York Stock Exchange (NYSE) on Wall Street in New York.
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Stocks jumped on Thursday after a weaker-than-expected rise in the consumer price index dragged down bond yields and the U.S. dollar on hopes that the Federal Reserve could be less aggressive in its fight against the inflation. The Dow Jones Industrial Average increased by more than 2.5%, the S&P500 increased by more than 4% and the Nasdaq increased by more than 5.5%.
While encouraged by the strong rally, recouping Wednesday’s steep equity losses and more, we are hesitant to fully accept this decision as a brutal turning point in the year for investors, fearing it could be a another short-lived bear market bounce.
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