stocks fall after inflation report

US stocks are sharply lower in early US price action today after hotter than expected CPI reading for August. US inflation rose 8.3% on an annualized basis in the month which was worse than expected.

On a monthly basis, CPI rose 0.1% while core inflation rose 0.6%. Both these metrics were far worse than expected and analysts were expecting CPI to fall 0.1% while core inflation to rise 0.3%. Notably, while gas prices came down in the month and put downwards pressure on inflation, they were more than offset by higher food and shelter costs.

Meanwhile, used car prices continue to drop in the month. Due to supply chain issues, US auto production has fallen. Also, automakers have raised vehicle prices to combat higher inflation. These two factors led to an increase in used car prices also.

US automakers are pivoting towards zero-emission cars. Bank of America is optimistic about the EV (electric vehicle)  plans of both Ford and General Motors and expects them to snatch market share for Tesla which is the market leader in the US by a wide margin.

While some Wall Street analysts have turned bearish on Ford stock amid the recession concerns, billionaire hedge fund manager Ray Dalio bought more Ford shares in the second quarter.

US Stocks Crash after Worse Than Expected Inflation

US stocks are sharply lower today after the worse-than-expected inflation reading. The S&P 500 closed higher last week after three consecutive weeks of losses. Markets got a little too complacent on inflation amid falling gas prices. The August CPI has yet again shown that there is a long way to go before US inflation falls to comfortable levels.

Growth stocks have especially seen a massive sell-off amid higher inflation. While inflation in general is negative for stocks, some investing strategies can do well in inflation.

Markets had started to factor in a Fed pivot amid slowing growth. However, the July minutes showed that the Fed is not looking to pivot anytime soon. If that wasn’t enough, Fed chair Jerome Powell dashed all hopes of an early pivot at the Jackson Hole Symposium.

Powell said that this is “no place to stop or pause.” Powell added, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”

Fed has raised rates four times this year to tame inflation which is running at the highest level in decades. Most agree that the Fed erred in terming inflation as “transitory” and waited too long to raise rates.

Brace for More Rate Hikes in 2022 on Sticky Inflation

The Fed began the process of tapering late last year and finally raised rates by 25 basis points in March. It followed up with a 50-basis point rate hike in May. In June and July, Powell raised rates by 75 basis points. Looking at the hot August inflation reading, a 75-basis point rate hike looks the most likely scenario at the Fed’s meeting later this month.

For stocks, Fed’s rate hikes are almost invariably negative. The rate hikes increase the risk-free rates and hence earnings get discounted at a higher rate, lowering their present value. Things are particularly bleak for growth stocks which have most of their earnings skewed towards the future.

The valuation multiples of US stocks have fallen amid rising interest rates. Michael Burry, who correctly predicted the US housing market collapse of 2008, has said that after valuation multiple contraction, we’ll next see downwards earnings revision.

In the second quarter of 2022, Burry sold all the holdings of his Scion Asset Management and added a small position in Geo Group stock. Burry has been warning of a stock market crash for quite some time now. Some of the undervalued stocks might be better placed amid the Fed’s aggressive rate hikes.

Interest Rates Are Rising Globally

Inflation is rising globally, and so are interest rates. Bank of America noted that 29 out of 34 central banks globally are raising rates to combat inflation. It sees the synchronized rate hikes as negative for markets.

Earlier this month, the European Central Bank (ECB) also hiked rates by 75 basis points. ECB chief Christine Lagarde said, “We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period.” She signaled that the rate hikes would continue into 2023 as well.

Analysts Get Bearish on US Stocks after CPI Release

Several analysts have issued bearish notes on US stocks after worse than expected August inflation report. Matt Peron, director of research at Janus Henderson Investors said, “The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes.”

Mike Loewengart, head of model portfolio construction at Morgan Stanley said, “Today’s CPI reading is a stark reminder of the long road we have until inflation is back down to earth.” Morgan Stanley is quite bearish on US stocks and expects the S&P 500 to fall below its June lows. Jim Cramer meanwhile believes that the US markets would hold above their June lows.

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