Why The Fed’s Balancing Act Is Tilting in Wall Street’s Favor

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On August 7, 1974, a 24-year-old French high-wire artist named Philippe Petit was preparing to do something no one had ever done before.

Shortly after 7 a.m., Petit stepped onto the roof of the South Tower of the World Trade Center. Dressed in all black and carrying only a long balancing pole, he made his way onto a steel cable stretched between the Twin Towers – 1,350 feet above the streets of New York.

_{Source: twintowers_nyc / Instagram}

For nearly an hour, he walked back and forth between the towers. He bowed to the crowd below, sat on the wire, and, at one point, even lay down on it.

He did it all without a harness or safety net. And it remains one of the most remarkable high-wire feats in history.

Now, more than 50 years later, the Federal Reserve is trying to pull off a balancing act of its own.

Of course, the stakes are very different. But the Fed has its own tightrope to walk.

You see, the Fed has two mandates: keeping inflation under control and supporting the labor market. And right now, those two sides are giving Fed officials a lot to think about.

We got a reminder of that last Friday, when the July jobs report showed that the U.S. economy lost 23,000 jobs. On top of that, May and June payroll growth was revised lower by a combined 103,000 jobs.

Clearly, the labor market is starting to lose some momentum.

Now, there is a lot of confusion about the job market, because the unemployment rate actually fell from 4.2% to 4.1%.

Somehow, a million people disappeared from the workforce. So, whether that’s baby boomers retiring or some workers being deported, I honestly have no idea.

But I do know that the Fed has an unemployment mandate. And if we’re losing jobs, the Fed won’t want to raise rates.

Then this week, we got fresh inflation data, with the Consumer Price Index (CPI) report yesterday and the Producer Price Index (PPI) report today.

So, in today’s Market 360, let’s take a closer look at the latest inflation numbers, what they mean for the Fed and the stock market – and where I believe some of the biggest opportunities are taking shape right now.

A Closer Look at Inflation

Yesterday’s CPI report came in largely in line with economists’ expectations.

Consumer prices rose just 0.1% in July, dropping the annual inflation rate to 3.4% from 3.5% in June. Core inflation, which excludes the more volatile food and energy categories, rose 0.2% for the month and slowed to 2.5% year over year.

So, overall, inflation continues to move in the right direction.

And the best news came from shelter costs.

Shelter accounts for a significant share of the CPI, so when those costs are running hot, they can have a big impact on the overall inflation number.

Well, shelter costs rose just 0.1% in July, matching June’s increase. That tells me one of the biggest sources of inflation pressure is finally cooling off. And that’s very good news.

Energy prices also fell 1.5% in July, thanks in large part to a 2.9% drop in gasoline prices. That was certainly welcome news. Still, energy prices remain 14.7% higher than they were a year ago.

So, energy is still one area I’m watching closely. We all know tensions in the Middle East continue to create uncertainty around oil prices. But I have consistently said that the Fed cannot control energy costs, and it would be foolish to hike rates just because energy prices are high.

Of course, the CPI only tells us what consumers are paying. To get a fuller picture of inflation, we also need to look at what businesses are paying further up the supply chain.

And that’s where today’s PPI report comes in. And the news there was even better.

Producer prices were unchanged in July, better than the 0.2% increase economists expected. Year-over-year, producer prices rose 4.7%, down from 5.5% in June.

It was an outstanding report. And the details were encouraging, too.

Goods prices fell 0.7% for the month, while food prices declined 0.9% and energy prices dropped 3.1%. Services prices rose just 0.2%.

So, when you put the CPI and PPI together, I think the takeaway is pretty clear: Inflation has cooled off dramatically.

And that takes a lot of pressure off the Fed.

What This Means for the Fed

And that brings us back to the Fed’s balancing act.

As we’ve seen over the past week, inflation is cooling while the labor market is losing some momentum.

The only real concern in today’s PPI report was that some of the components that feed into the Fed’s preferred PCE inflation gauge could move higher. And that has some people worried the Fed may still have to raise rates in September.

There’s also been a lot of attention on the fact that the federal funds rate (3.50% to 3.75%) is still above the two-year Treasury yield. That’s led some investors to argue that either market rates have to move lower or the Fed will eventually have to raise its own rate.

But market rates are already moving lower. Today, we are seeing the two-year yield at about 4.14% – that’s down from a recent high of 4.36% about three weeks ago.

So, with inflation cooling this dramatically, I don’t think the Fed needs to do anything.

To me, it looks pretty good for no Fed rate hike.

That’s a pretty encouraging setup for the stock market.

Where I’m Focusing My Attention Now…

So, what’s next for the markets? Let me walk you through what I’m seeing.

The S&P 500’s earnings will likely be up by about 50% by the time earnings season is over.

The acceleration in earnings is just unreal – and I’m seeing strength in a lot of different groups.

And that’s just the S&P. Many of my fundamentally superior stocks are posting earnings growth in excess of 100%!

That’s why I remain so bullish on this market.

And one area where I continue to see some of the biggest opportunities is artificial intelligence.

As the AI buildout continues, companies are spending enormous sums on data centers, chips, power and other infrastructure. And that spending is creating opportunities across a wide range of industries.

But there’s another side to that story.

The bigger this AI boom gets, the more potential investments there are to keep track of.

I, along with my InvestorPlace colleagues Luke Lango and Eric Fry, have all spent years searching for the best ways to profit from this trend.

And we’ve uncovered a ton of opportunities along the way.

At a certain point, though, simply finding another good stock isn’t necessarily the hardest part.

The harder question is… Which opportunities deserve a place in your portfolio? How much should you put into each one? And how should all those investments fit together?

Those are questions I’ve been thinking about a lot lately.

And Luke, Eric and I have been working behind the scenes on what I believe is a much better way to answer them.

Now, I don’t want to get ahead of myself today.

But next Wednesday, August 19, the three of us are making a major announcement that could change the way you approach the AI opportunity from here.

You see, I’m shifting my focus because I think there’s an even better way I can help you take advantage of the opportunities in this market.

To help make sense of all these opportunities… narrow the field… and give you a clearer way to put your money to work in what I believe remains one of the greatest wealth-building trends of our lifetime.

I’ll explain exactly what we mean during our special event next Wednesday, August 19.

I hope you’ll join me on to hear the full story.

You can reserve your spot right here.

Sincerely,