LABJ Stock Index: January 23

Inflation Cools, But Is Growth Next?

Stocks rallied and bonds saw gains on the heels of the latest U.S. inflation reading. Both headline and core (excluding food and energy) prices cooled in December for the sixth consecutive month.

Inflation prints have been a big driver of markets over the last year, with stocks popping on softer prints and sinking on hot prints. For instance, the S&P 500 saw a single-day rally over 5% in October, with one of the first signs of cooling prices, and fell more than 4% in August, when prices soared above expectations. These two days ended up being the best and worst days of 2022.

Observations from the Consumer Price Index report

1. Inflation is trending in the right direction. The latest CPI print showed that economy-wide prices fell by 0.1% in December.

2. Home prices set to decline. Home prices have already begun to cool as higher mortgage rates have weighed on housing activity, and new asking prices for rental leases are moderating.

3. Markets don’t believe the Fed. The next Federal Reserve Board meeting is Feb. 1, and the central bank is widely expected to downshift from its last 50-basis-point rate hike to a 25-basis-point rate hike. However, the financial markets are forward-looking and attempting to forecast policy, not prescribe it. 

4. Things seem less miserable. The Misery Index, which adds the inflation rate to the unemployment rate, has been gradually coming down since June, as headline inflation has fallen by over two percentage points while the unemployment rate remains extremely low at 3.5%.


The good news is that inflation data is trending in the right direction. The bad news is that the full impact of the Fed’s recent tightening cycle has yet to be felt. An eventual pause from the Fed will probably be seen as a positive catalyst for risk assets once it occurs, but it likely won’t negate the economic slowdown ahead. Investors should expect more market volatility in the first half of this year, but we remain optimistic that market sentiment will improve in the back half of the year as investors price in an eventual economic recovery next year.

We are always looking for opportunities across markets. Small- and midcap equities, preferreds and dislocated market segments such as semiconductors are among our more tactical areas of focus. Investors could be well served thinking through ways to not just protect their portfolios in the event of recession, but also to position for the recovery that could come after.

Rick Barragan is the Managing Director, Los Angeles Market Manager, for
J.P. Morgan Private Bank. | (310) 860-3658