| There is plenty of evidence that inflation is peaking. Lower inflation is certainly better than the alternative but hopes of an about-face on the part of the Fed may be premature. First, there was nothing especially unique about the latest “soft” inflation report of 0.3% month-over-month. This is the third time this year that month-over-month inflation was 0.3%, and the previous two examples were followed by consecutive increases of 0.6%. The Fed is not looking at just one month, and they are certainly looking for something much lower than a 6% annualized run-rate for inflation – annualizing the average inflation reading over the last three months equals about 6%…exactly what it was before the latest report. In many ways, the story has not changed, even if equity markets are behaving as if it has. The complexion of the recent market rally calls into question its durability, in our view. In hopes of less aggressive monetary policy and ultimately lower than anticipated interest rates, it has been the worst performing (lowest quality) stocks of 2022 that have dramatically outperformed in the recent stock market rally. In many cases, these are the stocks most impacted by interest rate policy. To us, this looks like a knee-jerk snapback driven by the false hope of a material near-term shift in Fed policy. The market likes the idea of falling inflation and a slower pace of rate hikes, but the relief may be short-lived. When investors come to grips with the fact that inflation is coming down because the economy has a growth problem, the recent rally will likely reverse course. |
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