The Market Is Experiencing Indigestion Regarding How To View Inflation

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In his Daily Market Notes report to investors, while commenting on the persisting inflation, Louis Navellier wrote:

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The market is experiencing indigestion regarding how to view inflation, what to do with P/E multiples, how high interest rates may rise, and importantly how quickly, as the Fed takes away the punch bowl of monetary support. Nevertheless, an anticipated reopening will present recovery opportunities that are fairly predictable.

Expect some near-term volatility as we navigate to the end of the pandemic and begin to experience the tapering by the Fed and use the pullbacks as a buying opportunity to position for a strong recovery come springtime.

The good news is that as painful as the start of the week was, essentially all that NASDAQ did was “retest” its December 3rd and December 20th lows intraday before re-surging on higher trading volume.  The subsequent resurgence in NASDAQ has been on higher trading volume which is a great sign of persistent order imbalances and that the current rally is likely sustainable.

The only bad news is that when NASDAQ retested its December 3rd and December 20th lows, they were a bit lower on each retest, so some technical analysts may argue that the stock market is merely having a “relief rally” that may eventually fizzle.  I am not in the relief rally camp, since the stock market is now commencing to release another round of stunning quarterly earnings.

Inflation Persists

The big news this week was that inflation is now running at the highest pace in almost 40 years after the Labor Department announced on Wednesday that the Consumer Price Index (CPI) rose 0.5% in December So overall, inflation persists on the consumer level and is not expected to abate until possibly the second half of 2022 when some supply shortages diminish.

If you thought yesterday’s CPI was bad, today’s Producer Price Index (PPI) figures were more problematic.  The PPI increased only 0.2% in December, which was substantially below economists’ consensus estimate of a 0.4% increase but on a trailing 12-month basis, the PPI rose a stunning 9.7% in 2021.  Ouch!

Longshoremen Holiday

The number of containerships off of the ports of Long Beach and Los Angeles are now back above 100 as many longshoremen that operate the cranes have called in sick from Omicron.  So if you are looking for some good news, after the U.S. gets infected with Omicron and we all recover, then maybe some of the port and shipping bottlenecks can get resolved once and for all.

The record cold weather in the Northeast and much of the Midwest is expected to send natural gas prices soaring.  Additionally, crude oil prices continue to meander higher.  In other words, even though energy inflation paused briefly in December, it is re-surging in January, which means that record inflation is expected to persist.  I should also add that robust economic growth is also causing “demand push” inflation.  Currently, the Atlanta Fed is estimating that fourth-quarter GDP growth was running at a robust 6.8% annual pace!

This is a good time to remind all investors that as inflation persists as the Fed raises interest rates that the dramatic appreciation in residential real estate is expected to continue to slow as higher mortgage rates and affordability issues curtail the annual pace of price appreciation.

I should add that Fed Chairman Jerome Powell on Tuesday before the Senate reaffirmed that inflation was now the Fed’s primary focus and that the Fed would be raising interest rates since the economy no longer needs emergency support.  This essentially means that the stock market is expected to remain your best inflation hedge, especially growth stocks that are sustaining strong sales and earnings.

The Labor Department reported that unemployment claims in the latest week rose  Overall, it appears that Omicron may be impacting weekly unemployment claims, but as long as continuing claims continue to decline, it bodes well for a strong job market.

Coffee Beans

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