Is Inflation An Issue For The Stock Market? Forecast And Analysis

S&P500 bulls pushed index to a new record closing high while largely looking past current inflation worries that many feel are overblown. And it makes sense as recent rise of prices was caused by supply shortage. The Consumer Price Index data now shows +5% headline and +3.8% core inflation which are the highest since September 2008 and May 1992, respectively, yet the S&P 500 trades to fresh new all-time record highs.

Fundamental analysis

Interestingly, June 2008 was when oil prices hit their all-time highs at +$140 per barrel. But the big kicker is how quickly higher oil prices drove up gasoline prices at the pump, which jumped higher by over +30% that month and added a massive amount to headline inflation.

The same thing has happened here as of late with the big rebound in oil prices causing a very sharp increase at the pump in a very short timespan, which many on Wall Street argue contributes to about 35% of the current headline CPI inflation number.

As for the core inflation number, which is measured minus energy and food inflation, it was also the highest we’ve seen in many years, going back to 1992. Bulls are quick to point out if we don’t include the massive jump in used car prices and the rise in transportation services the core inflation number released yesterday wouldn’t even be a conversation.

Labor market

Data last week also showed Weekly Jobless Claims have now fallen for six straight weeks, which has some analysts thinking the labor market might be witnessing a significant turnaround. With vaccines growing more widespread and about half of U.S. states ending pandemic-related unemployment benefits at the end of this month, it stands to reason that more people are going to be reentering the labor force.

The real question is whether they are the kind of workers that are currently in high demand, which appear to be factory and warehouse laborers, truck drivers, and restaurant and other lower-wage service workers. Rising wages seem to be largely concentrated in these sectors. An extremely tight labor crunch in the manufacturing, warehousing, and trucking industries in particular has been big contributor to raw material shortages. The latest jobs data indicate that some 9.5 million people were still out of work at the end of May.

At the same time, employers are struggling to fill about the same number of positions. With so many critical pieces of the economic puzzle still in flux, most analysts expect the U.S. Federal Reserve will maintain its current policy at next week’s meeting on June 15-16. The Fed believes inflation is “transitory” and largely the result of temporary supply-side issues, not persistently higher demand. As the supply gaps get filled, prices should level out.

While the labor market is still a long way from pre-pandemic levels, the overall economy has rebounded faster than the Federal Reserve initially expected. That more so than inflation worries has many analysts expecting the Fed will move up their timeline for beginning rate hikes to possibly late 2022. Expectations are pretty high that officials will also begin discussing how to start tapering back monthly asset purchases.

Technical analysis

Most of the tools are given mixed signals, while key economic indicators (unemployment, stress index etc) confirm the bull trend. Certainly, the situation can change. But as for now, there are no signals of crash coming. Pullback? – Possibly, especially at the end of this month. Based on the cycles studies, we can expect some weakness in the marketplace at that period of time.

Advanced decline line is still the way stronger then the price is. It may indicate strength in the stock market. Likely, it will not be so easy to breach the massive resistance 4230 – 4250. But its the range to watch. The recent few sessions were too choppy and difficult to trade even on the intraday basis. Some time is need for market to generate meaningful signal. The intermarket forecast and cycles study show a potential rally at the beginning of July. So, those are two interesting time points for short-term traders.

Is Inflation An Issue For The Stock Market? Forecast And Analysis by Inna Rosputnia

Wishing you a great week!