Stock Prices Trapped by ‘Sticky’ Inflation

  • Stocks recently rallied on signs that decreasing inflation could prompt a Fed pivot
  • Inflation is proving to be ‘sticky’ and may result in interest rates staying higher longer
  • Market experts are moving into real assets to preserve wealth during the uncertainty

Data Points to ‘Sticky’ Inflation

The promise of shrinking inflation propelled a rally in risk assets. Yet Jamie Dimon, CEO of JPMorgan Chase, said “People should take a deep breath on this one before they declare victory.” Experts agree that the rally will be short-lived due to ‘sticky’ inflation. Combined with a surprisingly strong jobs report, inflation may give the Fed no choice but to raise interest rates higher for longer.1

Fed Chair Powell said disinflation has begun. December’s CPI was the smallest year-over-year increase since October 2021. It was at 6.5% on an annual basis, down from a 9.1% peak in June 2022.2

But that isn’t painting the most accurate picture of the economy. The Fed is monitoring a category that’s become known to Wall Street economists as “supercore” inflation. Supercore inflation is service industry inflation minus energy and housing. Supercore inflation surged to a 40-year high of almost 7% last fall. It has only slowed to a 6.3% rate.3

In addition, economists are factoring in the routine revisions to 2022′s inflation data. The new data shows that inflation hasn’t been falling as fast as the original reports had suggested. The chief U.S. economist at Morningstar said, “Based on the revisions to recent historical data, the decline in core inflation now looks less impressive than previously shown.” Overall, the signs indicate that inflation will be more persistent than once forecasted. 4

Stock Prices Trapped by 'Sticky' Inflation

Sticky Inflation and Stock Prices

Analysts expect S&P 500 earnings to decline 3.7% and 3.1% in the first two quarters of 2023. Tim Drayson is the Head of Economics at Legal & General Investment Management. He expressed his doubts about the future of equities. He said, “I don’t see how you can get inflation back to target without a recession, and that means equities will be disappointed either on inflation or on earnings.” Michael Farr of Farr, Miller, and Washington shared this opinion. He said he “certainly wouldn’t be a buyer of the stock market. The risk is higher, and the potential reward is much lower right now.”5

Michael Burry of ‘The Big Short’ fame warned that recent rallies remind him of previous irrational tech buying sprees. To him, investors are ignoring the reality of inflation. Burry sees inflation decreasing as we enter a recession. Only for the Fed to pivot and stimulate the economy. This will result in inflation spiking to double digits. Burry isn’t sitting in cash waiting for the market to crash. Instead, he is investing in recession-proof, real assets that perform when the economy suffers, and inflation is high.

The Fed and Wall Street are waking up to the fact that inflation is going to be with us for a long time. Like Michael Burry, investors should look to real assets to protect the value of their portfolios. Precious metals are highly accessible real assets proven to preserve value during periods of sticky inflation. Contact us today to learn how a Gold IRA can help you.

1. https://www.yahoo.com/now/jamie-dimon-fears-markets-may-164412929.html
2. https://www.cnbc.com/2023/02/13/a-new-inflation-warning-for-consumers-coming-from-the-supply-chain-.html
3. https://www.marketwatch.com/story/cpi-in-the-spotlight-fed-worried-about-sticky-inflation-f56efd9e
4. https://www.morningstar.com/articles/1137589/january-cpi-report-shows-sticky-inflation-is-back
5. https://www.reuters.com/markets/us/us-stock-rally-faces-uphill-climb-after-mixed-inflation-data-2023-02-14/
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