[Charts] Too Hot to Handle?

Lou Basenese

Friday, September 16, 2022

Every Friday, I curate a handful of graphics to convey some important investment insights.

All it takes is a quick glance — and you’ll be up to speed and poised to profit.

In this week’s edition, I’m shining the light on the only thing that matters to investors right now – inflation.

Inflation Peek-A-Boo

In recent months, I boldly predicted inflation would peak.

With major input prices coming down, including shipping costs, fuel costs, and fertilizer costs, among others, I contested that it’s only natural that headline inflation starts turning down, too.

Going into this week’s reading, that’s precisely what unfolded over the past few months, which is why stocks started rallying again.

In fact, a month ago, I shared the following chart that definitely proved what I had been predicting.

(click image to enlarge)

Fast-forward to this week’s report, though, and the picture got a little less clear.

As you can see, headline inflation continues to come down – from an annual rate of 8.5% last month, to 8.3%.

However, if we strip out food and energy, pretty much every other category posted increases, which led to an unexpected uptick and spooked investors out of stocks.

(click image to enlarge)

Here’s the takeaway: we’re clearly not out of the woods yet, nor are the current inflation rates of 8.3% or 6.3% bearable over prolonged periods of time.

As a result, the Fed’s still not done hiking interest rates, which means there’s more volatility dead-ahead for stocks.

That’s the bad news.

The good news? A “market-based” consensus appears to be forming that we’re getting closer and closer to critical price relief.

Case in point: Inflation expectations have come down sharply – to 2.46% over the next five years from a panic-inducing peak of 3.4% a few months ago.

(click image to enlarge)

To be clear, I called this a “market-based” consensus to make a key distinction…

You see, the 2.46% reading is not the average of what some group of Ivory Tower economists expect. Instead, it’s based on “breakevens” between typical Treasury bonds and inflation-protected Treasury bonds.

In other words, the reading is the result of hard-earned and meaningful capital being deployed, based on expectations. As such, it’s a much more reliable indicator.

So although the latest inflation report led to short-term volatility, relief is coming. That means we should continue to treat any more volatility as an opportunity to add to high-quality, undervalued investments. Like the ones I singled out in Tuesday’s column.

Ahead of the tape,

Tags: friday-charts inflation