Inflation and the Fed were the main investment stories throughout 2024. However, in early January two other stories jumped to the front of the line:
- Government debt concerns causing higher long term Treasury rates
- Trump Tariff Plans (and the unknown outcome)
I give a pretty good accounting of these 2 vital stories in my commentary from earlier this week. Today the focus returns to inflation and the Fed as CPI and PPI reports were served up. Let’s dig in to find out what they tell us.
Market Outlook
Coming down the home stretch of 2024 we endured several straight months of inflation reports that did not ebb lower. The Fed was fully aware of this leading to their 12/18 announcement that indeed inflation is a bit too persistent and thus they will slow down their planned pace of rate cuts.
Traders threw a tantrum like a 3 year old who was told they won’t be getting a 4th slice of cake at the birthday party. This led to a broad market pullback with many groups in full blown correction territory (namely small caps and any groups that were counting on lower rates like home builders).
The good news is that the January inflation reports are showing some improvement in the data. Most investors will want to focus on the more widely followed CPI report from 1/15. There we saw core inflation cool a notch from 3.3% to 3.2%.
The most beneficial part of that release was the modest 0.2% month over month reading for core CPI. If that held up it would get the annual pace down closer to the 2% target.
Investors don’t pay as much attention to the PPI report. However, economists understand it is a leading indicator of what shows up in CPI down the road.
Here too the best news was on the month over month numbers where core PPI was flat. If this moderating trend continues, then it once again helps point to getting inflation back to the 2% Fed target.
These reports did not move the needle on expectations for the next Fed meeting on 1/29. It is widely understood from last time that no rate cut will be forthcoming. In fact, they are projecting only 2 cuts in the year ahead with investors right now thinking that is next at the May or June meeting.
Pulling back to the bigger economic picture, the good news is that most of the data is in for economists to accurately model Q4 GDP. Most are coming out in a range of +2.5% to 3%. That would be a robust reading that should also point to solid earnings growth.
The best news on the economic front to share is that the NFIB Small Business Optimism index LEAPT from 93.7 in October before the election to 105.1 now. This is the highest reading since October 2018.
The more optimistic these business owners feel about the future...the more likely they are to invest in their business including the hiring of more employees to fuel growth. So this is great news to increase the odds of more quality GDP reads in the quarters to come.
For as good as all that economic news is, I still think the unknowns about government debt and especially tariffs will weight heavily on stocks.
Just don’t see a current catalyst for the S&P 500 (SPY) to make new highs above 6,100.
On the downside is the recent lows around 5,800. And if that falters then we are talking about a rendezvous with the 200 day moving average currently at 5,589.
That downside should not scare you that much. Especially since the bear market low is 3,491. Meaning that just like Virgina Slims ads “we’ve come a long way baby”.
This just seems like a natural juncture to consolidate under the highs + sector rotation to shake off any excess valuations.
This means to expect a fair amount of volatility. Both big drops and big bounces. The kind of action that can get an investor nauseous.
The solution is to keep your eyes on the long term horizon which is still bullish. So best to use any forthcoming dips as an opportunity to load up on the best stocks for the next higher.
Which stocks are those?
Read on in the next section for the answer...
What To Do Next?
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- 1 stock to short
- 1 ETF to buy
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Wishing you a world of investment success!
SPY shares were trading at $597.18 per share on Friday morning, up $5.54 (+0.94%). Year-to-date, SPY has gained 1.89%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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