Stocks Soar on Cool Inflation Reading, but Does This Rally Have Staying Power?

Weekly initial jobless claims, a forward-looking indicator, also remain at or near historic low levels. Any way you slice and dice these numbers, the job market remains strong. This one part of the mandate that the Fed is looking at doesn’t seem to show an immediate need to slow the tightening.

Conversely, the inflation front has been stubbornly persistent, as everyone is watching closely for any sign of a peak that could begin to tame the Fed. On Thursday, October’s CPI report seemed to offer a first glimmer of hope, as the widely watched index rose less than expected last month — and the report showed the lowest annual increase for consumer prices since January.

But we may not be out of the woods yet. While October CPI came in at a cooler-than-expected 7.7%, year over year, it is still nowhere near the Federal Reserve’s target rate of 2%. Looking at other recent inflation data, the Employment Cost Index, the broadest measure of labor costs, was up 5.0% in the third quarter, year over year.

Meanwhile, the core personal consumption expenditures price index, the Fed’s preferred inflation gauge, climbed at a 5.1% annual pace in September. This climb from August’s 4.9% annual pace marks the second straight month of increases in the annual pace for the core PCE index and brings it back to its highest rate since March.

At the same time, West Texas Intermediate crude oil continues to hover around the $90 level. I believe the market may be signaling something here, and we need to keep an eye on it. Does it have to do with China reopening plans? Of course, nobody knows. There has been much speculation on when China will reopen and, until it does, it all remains speculative. But if and when that happens, inflation only goes higher.

How I’m Investing Right Now

Will there be a recession in 2023? We don’t have a crystal ball, but we expect to hear this conversation over and over again. It is important to keep a close eye on what is happening below the surface and not to respond to every big swing that follows a new inflation reading.

There are parts of the market that have been doing better than the headlines suggest — and that is where I continue to focus right now. The real story is the underlying rotation, as we have seen a massive rotation in the market to value from growth. And the cuts to growth, of course, have been most pronounced in the technology sector, and these stocks are still vulnerable to a potential “higher rates for longer” new normal ahead.

In this environment, I remain more bullish on value versus growth and on cyclical versus defensive. I am heading into the end of the year overweight on energy, financials, industrials and materials, while underweight on technology and communications services.

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower Advisors LLC. She leads the firm’s Investment Solutions Group. Follow Stephanie on LinkedIn and Twitter @Stephanie_Link. Read her regular market insights here.

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