Stocks Fundamental Forecast: Bullish
- Dow Jones[1], S&P 500[2], Nasdaq[3] 100 fell but the bull market remained
- Stocks do tend to be more volatility in higher inflationary periods
- Fed policymakers may continue reiterating transitory price outlook
On Wall Street, futures tracking the Dow Jones, S&P 500 and Nasdaq 100 wrapped up this past week with a loss, falling about 0.6%, 0.3% and 1% respectively. While this ended a 5-week winning streak, these declines were hardly noticeable in comparison to the broader bull trend since the 2020 pandemic bottom. What is driving this and will it continue?
The slight increase in volatility this past week could have been traced to the latest US inflation report. In October, consumer prices climbed a whopping 6.2% y/y, leaving inflation running at its hottest pace since the early 1990s. This trend also transpired into deteriorating consumer confidence. On Friday, University of Michigan (UofM) sentiment data[4] fell to a new post-pandemic low of 66.8. This was last seen 10 years ago.
The details of the report showed that consumers see inflation rising about 5% in the next year, the most since 2008. This is being driven by surging food, gas and housing prices. The CPI report showed that real wages are still negative. This means that inflation continues to erode their purchasing power. Yet, equities continued to hold onto their momentum, recovering cautiously on the UofM data.
University of Michigan Sentiment – Monthly Chart
Chart Created in TradingView[5]
The risk for equities is that higher inflation results in a hawkish shift at the Federal Reserve. On the whole, policymakers continue to gauge that recent price trends are transitory. Last week’s inflation print brought back market expectations for 2 Fed rate hikes by the
