Inflation May Have Peaked: What to Do Now

Inflation May Have Peaked: What to Do Now

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The S&P 500’s losing streak continues… for the sixth week.

To add insult to injury, the S&P 500 has dropped a hair’s breadth from 20% (considering the highest high set last January to the lowest low set last week)… which would be a bear market, technically speaking.

It is very unusual for the market to decline that much while earnings growth is still positive. But, as an old Chinese curse says, “May you live in interesting times,” it appears we are doing just that.

Like most investors, we have been waiting for data to suggest that we have hit “peak inflation,” and last week, the CPI and PPI reports suggested that may be the case. What this means is we’ve hopefully hit our high, but the Fed’s recent actions may have gotten us over the hump and inflation can begin a decline.

Unfortunately, we don’t have any more official inflation reports this week that might confirm the decline but there is some very important retail sales data this week that should set the tone for the rest of the month.

On Our Watchlist

The lifeblood of the U.S. economy is consumption (consumer and business spending). So far, the data has been strong. Consumers keep spending more, partially because incomes are rising and partially because things (like gasoline and groceries) cost more. We haven’t seen evidence that inflation is “destroying demand” yet, which is a good thing for stocks.

On Wednesday this week, the U.S. Census Bureau will release total retail sales for the last month, and we expect the news to be good. It should help support Friday’s rally. Additionally, there are several big retailers reporting earnings this week including Walmart (NYSE:WMT) tomorrow and Target (NYSE:TGT) on Wednesday.

When these retail companies report their profits for the last quarter, investors will be waiting to hear what they think about the next 3-6 months – this is called the “outlook.” A very mild bullish or bearish bias in the outlook could send the market a lot higher… or lower.

What You Should Do

Over the last few weeks, we have continued to be cautiously optimistic that the market will pivot higher this spring and summer. We still favor consumer staples stocks, and maybe a sprinkling of large-cap tech that we expect to see a flood of buying if the pivot happens this week.

We were probably a little early on the gun, but there is just no denying that valuations in consumer defensive are still very attractive. In addition to the stocks we liked last week, we think it makes sense to look at some of the other stocks in the sector that have been remarkably defensive.

Johnson & Johnson (NYSE:JNJ) is in a sweet spot to benefit from strong demand for consumer goods and healthcare spending right now. Although we don’t usually like to recommend too many drug companies because volatility is so high, Pfizer (NYSE:PFE) is still holding at strangely low prices despite expected growth in demand for PFE’s products.

The Bottom Line

Last week was another loss, but it ended on a sweeter note after Friday’s rally.

A lot is riding on retail sales numbers from the government and the big retail stock profit reports that will be streaming in from Monday through Thursday this week. If the data looks good (i.e., no big negative surprises) then this may finally be the pivot point for stocks – or at least a few key sectors like consumer defensive and healthcare.

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