Inflation Holds Out
02.16.2024
The S&P 500 is up 5.5% on the year and currently hovers just below the all-time high set on February 9th. This growth is due to a stronger than expected economy, the general easing of inflation, and a healthy dose of optimism for artificial intelligence. Though the Federal Reserve appears to be sticking the landing, speedbumps are still possible. Higher-than-anticipated inflation reports remind us that there is still work to be done. As such, markets are tempering their expectations for Fed Funds rate cuts.
In January, the Consumer Price Index (CPI), which measures the average change in prices over time, rose 0.3%, or a 3.1% increase compared to a year ago. Economists had expected a monthly rise of 0.2% and an annual increase of 2.9%. Excluding food and energy, Core CPI increased by 0.4% in January — a 3.9% increase from a year ago — surpassing forecasts of 0.3% and 3.7% respectively. Shelter costs contributed to more than two-thirds of the CPI's overall rise. Additionally, the Producer Price Index (PPI), which tracks changes in wholesale prices, rose faster than expected, increasing by 0.3% in January, more than the expected 0.1%.
Though not a deal breaker for future rate cuts, the slight resurgence of inflation means the Fed will likely be more cautious. Bond markets have dialed back their expectations to three cuts of 25 basis points each in 2024, with the first cut not occurring until June. While this is not a fatal blow, it does put more pressure on the economy and has implications for stock market leadership. With interest rates on short-term U.S. Treasury bonds staying higher for longer, a broad rotation from money market funds into stocks that offer good value will be difficult to come by. In this landscape, companies that can grow organically are still highly valued. A lofty dividend yield is not enough on its own.
Big tech and communications stocks are well-known for their growth potential. Many of these stocks are pure plays on artificial intelligence and the long runway for growth in that space. However, there is plenty of growth to be found outside this group. Companies with excellent management teams, strong balance sheets, mostly domestic operations, clearly defined strategies, and a commitment to execution are thriving in this economy. We continue to seek out these stories.
Thanks,
Preston May, CBE®
Research Analyst
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