We may be in the early days of 2023, but one thing is clear – the stock market continues to be driven by headlines about economic growth, earnings and inflation.
Case in point: The December Consumer Price Index (CPI) report.
Yesterday, the market held its breath in the wake of this morning’s inflation report and then chopped around today following its release.
In today’s Market 360, we’re going to take a look at the CPI report – and talk about what it means for stocks as we head into the Federal Open Market Committee (FOMC) meeting on February 1.
Inflation Continues to Fall
The Labor Department released CPI numbers for December 2022 this morning. And as expected, headline numbers showed that inflation is continuing to cool down.
CPI rose 6.5% in December year-over-year, which was in line with expectations and the lowest number we’ve seen since October 2021. Down from November’s 7.1% reading, this marks the sixth-consecutive month of decline.
The core CPI, which excludes energy and food prices, was up 5.7% – which was also in line with economists’ expectations.
What I was most interested in in this morning’s report was the Owners’ Equivalent Rent (OER) component of the CPI, as it represents housing and rental costs. When looking at the core CPI number, housing costs account for more than half of the total increase.
In December 2022, OER rose 7.5% percent year-over-year, compared to the 7.1% increase in November. The increase is due mainly because of the cost of rent, which climbed 0.8% in December, up from 0.6% in November.
But the fact is that pending home sales declined 37.8% in the past 12 months, and home sales have plunged to the lowest level since immediately following the pandemic. Furthermore, we know rental prices are moderating. It just isn’t showing in the data yet.
So what does that mean?
The Federal Reserve will probably remain hawkish at February’s FOMC meeting. The good news is that votes on the Federal Market Committee are saying that they should only increase rates a 0.25%. That means there’s a growing consensus.
I still think the Fed is nearing the end of its current interest rate cycle. Remember, the Fed is now more in line with market rates, and the Fed never likes to fight the tape. So, I think future interest rate hikes will be minimal.
Overall, the Fed remains laser-focused on its inflation fight. As we continue to get data that indicates inflation has started to cool dramatically, we should start to hear a less hawkish Fed.
Prepare for a Market Liftoff!
Once Wall Street realizes that the Fed is done raising rates, I expect the market to lift off!
To ensure that we’re well-positioned to prosper once the market takes flight, I’ve advised my Breakthrough Stocks readers to stay invested in companies with strong earnings and sales growth, as well as positive analyst revisions.
The reality is earnings will be the key to success in the upcoming weeks and months, especially since the S&P 500 is expected to post negative earnings growth for the fourth quarter.
So, as the fourth-quarter earnings season heats up in late January and early February, it’s going to be “every stock for itself.” I anticipate companies that achieve positive earnings growth will be rewarded, as better-than-expected results drop kick and drive their shares higher.
My Breakthrough Stocks Buy List is stocked with fundamentally superior companies that are poised to take off. This includes last Friday’s addition to the Breakthrough Stocks Buy List, as well as the Breakthrough Stocks recommendation I just released this afternoon. It’s an energy company that is expected to post triple-digit earnings growth in the fourth quarter (earnings are scheduled to be announced in early February). A positive report should propel the stock higher, so folks who invest early could walk away with a nice profit.
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