Market Musings 110323: Focus On The Fed And Employment

11th Mar by Edmund Shing

4 comments 1161 reads

Market Musings 110323:
Focus on the Fed and Employment

Watch next week’s US CPI report closely on March 14

Summary

Historically peak US inflation has led to higher stock prices over the last 14 inflation cycles since 1945.
The S&P 500 index has risen around 12% following a peak in US inflation over the following 18 months.
This time around US CPI inflation peaked in June 2022, at 9.1%. As of January 2023, it has fallen to 6.4%. Cleveland Fed nowcast model predicts 6.2% overall CPI for February 23
According to the Cleveland Fed, the 1-year expected inflation rate has fallen sharply from 4% to just 2.6% as of February.
Since June 2022, the S&P 500 index has only risen about 1%, to date. Should we follow this historical inflation cycle average, we should see another 10% rise in the S&P over the next 9 to 10 months.
Watch the US 2-year bond yield for clues. This bond yield peaked at 5.1% last week. But at the end of the week, this yield had already fallen back to 4.6%.
Preference within stocks for Europe, UK and emerging market stocks rather than the US.

This week’s podcast:
Our investment strategy for March 2023

Is inflation rebounding, and if so, does this challenge our view of lower inflation throughout 2023?
Why are short-term Euro government bonds a good investment today?
Are stock markets about to fall again after rebounding since October?
Why should investors add alternative asset exposure to their portfolios?
Which asset classes that lost value in 2021 and 2022 have potential to rebound this year?

Will peak inflation continue to drive stocks higher?

Historically peak US inflation has led to higher stock prices over the last 14 inflation cycles since 1945.

Over the last 14 inflation cycles since 1945,
The S&P 500 index has risen 12% over 18 months from the peak in inflation

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Source: Bloomberg, Stifel

The S&P 500 index has risen around 12% following a peak in US inflation over the following 18 months.

This time around US CPI inflation peaked in June 2022, at 9.1%. As of January 2023, it has fallen to 6.4%.

US headline inflation…

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WarrantStar

12th Mar

Edmund. Thank you for a very interesting article, well backed up by data. Please could you give us your assessment of how much, or how little, the Silicon Valley Bank is likely to upset the markets?

BnB

I think the question you should be asking is how much of the recent fall in yields is down to expectations of falling rates and how much to fears of a systemic crisis owing to the SVB implosion. My sense is that it is the latter and therefore that the inferences of the article are premature.

BnB. Thank you for your reply. People ask the questions that they want answering. I am very capable of asking the questions that I would like answering, and of course you were free to do the same. Nevertheless, I do tend to come to the same conclusion as you do in that overall market conditions will determine whether I invest in anything at the moment.

Metatron

A lot of people expect a water drought this summer in Europe.If so that will put up food prices and may affect inflation forecasts

Market Musings 110323: Focus on the Fed and Employment