In anticipation of the new inflation numbers this morning, stocks took a beating yesterday. The S&P 500 and the Dow Jones Industrial Average were down 1.6% and 1.1%, respectively, while the tech-heavy NASDAQ Composite fell 2.1%.
Meanwhile, U.S. Treasury yields rose to three-year highs.
In fact, Monday, the Federal Reserve Bank of NY reported: “Median one-year-ahead inflation expectations increased again in March, climbing from 6.0% in February to a new series high of 6.6%.”
This sent expectations off the chart:
The Biden administration also tried to warn folks, stating that it anticipated inflation to be “extraordinarily elevated.”
So, it was interesting that the broader market rallied strongly today after the Consumer Price Index (CPI) reading for March, which measures consumer inflation, was released this morning.
And boy, was it ugly. The CPI rose to 8.5% year-over-year, slightly above economists’ forecast for an 8.4% year-over-year jump.
That’s on top of the recent reading for the Personal Consumption Expenditure (PCE) index, the Federal Reserve’s favorite inflation gauge. The PCE rose at a 6.4% annual pace through February. The core PCE, which excludes food and energy, is running at a 5.4% annual pace. The Fed still wants to see PCE closer to its 2% annual target, but I expect it will take at least until 2023 until it reaches that inflation goal.
And those numbers only tell part of the story. The UN Food and Agricultural Organization recently reported that the Food Price Index rose 12.6% in a single month. That’s the highest recorded level ever.
Everything is more expensive… and there doesn’t seem to be an end in sight.
In today’s Market360, we’ll review what’s causing this massive surge of inflation and the Fed’s likely action… and most importantly, how you can profit in this inflationary environment.
Inflation’s Surge
Inflation is the purchasing power of cash – how much you can buy for $1. In a healthy economy, inflation rises about 2% yearly.
The recent rise in inflation can be attributed to ongoing supply chain issues that started with global COVID-19 shutdowns, increase in demand, the Fed’s quantitative easing policy and the Russian/Ukrainian war.
For most of last year, Federal Reserve Chair Jerome Powell has said that the inflation situation is “transitory,” and prices would level out. It wasn’t until late 2021 that the Fed finally changed its tune.
As reported by CBS in late November 2021, when asked by lawmakers about the change of heart, Fed Chairman Jerome Powell acknowledged the central bank did not predict the supply chain issues in its projections.
Then last week, Fed officials warned that inflation was out of control and were prepared to take swift action to get prices back to normal…
In fact, the latest Federal Open Market Committee (FOMC) meeting minutes revealed that our central bank has grown more aggressive and more hawkish in its efforts to curb soaring inflation.
The minutes confirmed that the Fed will reduce its quantitative easing by $95 billion per month, with $60 billion in Treasury securities and $35 billion in agency debt.
To understand how aggressive this move is, consider this: The last time that the Fed pruned its balance sheet was back between 2017 and 2019, and it did it in $50 billion increments. Clearly, the Fed wants to shrink its balance sheet quickly, as it stands at nearly $9.0 trillion due to the COVID-19 pandemic.
In light of this morning’s numbers, it’s growing more and more likely that the Fed will raise key interest rates by 0.5% several times this year. Most Fed officials are onboard with 50-basis-point increases but opted for the 0.25% hike at the March meeting due to global uncertainty and fears of driving the U.S. into a recession.
But it’s not all bad news…
My favorite economist, Ed Yardeni, reported that “longer-term inflation expectations over the next three years ticked down to 3.7% from 3.8%” and that he expects inflation to peak sometime mid-year.
But no matter when inflation calms down… middle of this year, sometime in 2023 or later… there are things we can do as investors to set ourselves up for success.
Your Inflation Protection
If you are looking to offset rising prices you should be focusing on strategic inflation hedges.
It’s why I’ve spent the past few months aligning my Breakthrough Stocks Buy List to profit from inflation and the influx of investors returning to the stock market.
Specifically, we’ve taken steps to load up on energy, food, shipping and semiconductor stocks, as they’re all set to benefit from the recent surge in inflation. Not only that, as a result, we’re already well-positioned even if the U.S. economy would slip into a recession.
I should add that my Breakthrough Stocks Buy List is currently characterized by 57.6% average annual sales growth and 219.2% average annual earnings growth, so we’re also locked and loaded for the upcoming first-quarter earnings announcement season. This is important because S&P 500 earnings are forecast to deaccelerate in the first quarter in fiscal year 2022. Currently, FactSet expects S&P 500 earnings to grow 4.5% year-over-year. Revenue is expected to increase 10.7% year-over-year.
In an environment where it’s “every stock for itself,” companies that post better-than-expected earnings results should emerge as the market winners. So, I expect my Breakthrough Stocks companies to become go-to names for investors.
This includes four new stocks I added to my Breakthrough Stocks Buy List last Friday. These are companies that are profiting from rising prices and rates in a few strategic corners of the market, including food staples, marine shipping, semiconductors and oil and natural gas.
I will be releasing a fifth stock after the market close tomorrow. It’s another company that is benefiting from soaring energy prices, as well as continues to boast superior fundamentals, positive analyst revisions and persistent institutional buying pressure. So, it’s well-positioned to thrive in the current inflationary environment.
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