CPI Report Hits the Stocks Market
The latest CPI report just landed and it’s not looking great for the economy. The Fed is in a tough position and it has to continue pushing interest rates up to rein in high inflation. And it looks like a big bump at the next Fed meeting is more likely. As a result, investors are pushing down stocks across the board.
We saw a little bit of a recovery in stocks over the past week, but it’s reversing based on recent news. So, let’s take a closer look at the new CPI report and what this means for investors. As always, new economic data is impacting our investing opportunities.
Recent CPI Report and Inflation
In August, the consumer price index rose 8.3% over the past 12 months. This is headline inflation and that includes prices changes to energy and food. But if we take those items out, it gives us core inflation and that number comes in at 6.3% year-over-year.
We’ve all seen gasoline prices fall at the pump. Energy prices have come down in the U.S., but it hasn’t been enough to offset other increases. For example, food and shelter prices have continued to climb. And CPI covers a wide basket of goods and services.
Both headline and core inflation came in higher than expected. As a result, investors are expecting the Fed to continue pushing interest rates up at a higher rate. We’ll likely see a 75 basis point increase (0.75%), but there’s a chance we see a full percentage point instead.
The Fed has a tough hand to play and has to continue taking an aggressive stance to lower inflation. Based on recent months, we’re already seeing a lot of negative pressure.
CPI Report, Interest Rates and Stocks
Recent CPI reports show the economy has run a little too hot for too long. If inflation is left unchecked, it could lead to a wage-price spiral. That’s why the Fed has already started increasing rates. And with the upcoming increase, that’ll further limit consumers and companies.
By increasing interest rates, the Fed is slowing down borrowing. It’s limiting the ability for consumers and companies to access money to spend. And always keep in mind… someone else’s spending is another person’s income.
This is a feedback loop which takes some time to play out. But already, it’s putting downward pressure on the economy. And this isn’t good for most investors. As interest rates climb – and all else equal –, they lower current investment valuations.
Without getting too technical, interest rates on U.S. bonds determine what’s called the risk-free-rate. And this number is a key component for determining any asset’s valuation. It helps with discounting expected future cashflows.
With higher interest rates, the present value of expected future cash flows is lower. As a result, investors are willing to pay less for stocks. And this can lead to a compression in valuation metrics. But on top of that, it only gets worse for stock prices if company earnings are decreasing as well.
Stock Market Opportunities
Thanks to the recent CPI report, stock prices are coming back down. This isn’t great for our existing investments. My portfolio of stocks has been hit hard and I’m seeing a lot of red. Although, with any downturn comes opportunities.
As stock prices drop further, we can find better buying opportunities. If you’re playing the long-game and have some cash on hand, you can pick up shares at a discount. Or you can reinvest recurring dividend income at lower valuations.
Many companies have had their valuation multiples drop back down to – or even below – their historical averages. Although, many of these companies still have great long-term prospects. That’s why now might be a better time to buy.
If you’re looking for some investing trends and stocks to consider, here are some opportunities…
As we get new CPI reports and other economic data, the markets will continue to ebb and flow. As a result, the best opportunities come and go. And that’s why it can be useful to stay up-to-date on the top trends and research.
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