Stansberry Research

Thursday Morning Market Comments

Stansberry NewsWire

Morning Market Commentary:

  • We'll see an "inflation pivot" this year.
  • Data from the Federal Reserve Banks of Atlanta and Cleveland shows that "sticky" inflation has yet to fall.
  • History indicates a market rally is likely to follow.

Last year, the "Fed pivot" became a favorite topic among news outlets...

Even us here at Stansberry Research couldn't refrain from talking about it.

You see, the Fed pivot is the point at which the Federal Reserve will either slow or pause its interest-rate hikes. And there's no denying the importance of that turning point for the economy.

But today, we focus on... the "inflation pivot." And we believe it’s just as important.

This morning, the U.S. Bureau of Labor Statistics will release its Consumer Price Index ("CPI") for December. And it should give us an idea of the future path of inflation.

Remember, it was only June of last year when headline inflation peaked, with the CPI showing an annual growth rate of 9.1%. In the most recent report, for November, the CPI had fallen to 7.1%.

As such, the Fed eased up on its interest-rate policy ever so slightly by only hiking rates 50 basis points, down from the previous four increases of 75 basis points.

The CPI played a major role in central bank policy in 2022 – and we can expect it to do the same in 2023.

Since the headline CPI likely peaked last year, the Fed can be confident in further slowing its pace of rate hikes. Now, it'll be looking for more concrete signals that pricing pressures are easing...

And when we put inflation figures under a microscope, it's clear there are two very different types of inflation the Fed is paying attention to.

There's flexible inflation and sticky inflation.

Sticky prices tend to incorporate long-term expectations about inflation and are slower to react to pricing pressures. Whereas flexible prices respond more quickly to current economic conditions.

For example, flexible CPI items include things like gasoline, fresh food, used and new vehicles, and clothing. These items tend to reprice after about 2.6 months.

Sticky CPI items include things such as shelter or owners' equivalent rent, medical care services, education, recreation, and household furnishings. And they typically reprice at about 10.7 months.

A decline in flexible inflation doesn't tend to sway the Fed away from its policy stance as much as when sticky inflation starts to decline. That's because sticky inflation accounts for about 75% of headline inflation and incorporates much larger economic components such as the housing market.

Once sticky inflation peaks – what I (Kevin Sanford) call the "inflation pivot" – the central bank is far more likely to slow rate hikes and even consider potential rate cuts.

However, a slowdown in both flexible and sticky inflation would give investors and money managers more confidence diving back into risk assets like stocks.

Take a look at the following chart showing the historical path of both the flexible and sticky CPI...

You'll notice that the flexible CPI has greater fluctuations, as expected. But it also peaks faster than the sticky CPI.

In fact, the flexible CPI tends to peak even before the headline CPI reading does.

Now, the following table outlines six significant inflationary periods throughout history. Look at the relationship between flexible, sticky, and headline inflation...

As you can see, a peak in the flexible CPI occurs about 10 months before a peak in the sticky CPI and about two months before a peak in the headline CPI.

The chart below shows inflation broken down since June 2020...

As you can see, the flexible CPI peaked in March and, three months later, the headline CPI peaked in June. As of the latest CPI reading for November, the sticky CPI was still rising. This means that over the next few months, the Fed will be paying close attention to inflation components such as Owners’ Occupied Rent (“OER”), for signs it can further decelerate its rate tightening.

Recently, we've highlighted our favorite articles from the past year – and what we believe to be the most pertinent for investors heading into 2023. A few of these pieces highlighted important economic triggers and how they'll affect stock market returns for the months and years ahead.

Some of them – such as the Fed's pivot to slower rate hikes – have already taken place. But the opportunity to capture value as an investor is not lost.

Tomorrow, we'll take a look at just how well the market performs following the inflation pivot and what you can expect this year.