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With inflation hotter than expected and spreading beyond pandemic-affected industries, the Fed appears poised to take more aggressive steps to rein in price increases. What does that mean for stocks? Read the latest Markets in a Minute for a look at how equities have performed during previous rate-hiking cycles.
Markets in a Minute: Inflation
Investors and policymakers hoping for signs that inflation is cooling were undoubtedly disappointed last week. The latest Consumer Price Index (CPI) release showed that inflation is not only picking up speed — climbing by a 40-year high of 7.5% in January — but spreading beyond corners of the economy hit hardest by the pandemic.
What does all this mean for U.S. stocks?
As the recovery has unfolded, the Fed has been careful (some might say too careful) to wait until the U.S. economy is on firm footing before pumping the monetary policy brakes.
In fact, even as prices and COVID-19 cases soared in January, the economy created far more jobs than expected. Wage gains also accelerated, and the labor pool expanded.
So far, S&P 500 corporate earnings for the fourth quarter have been strong, with the majority of reporting companies (77%) beating estimates. Corporate profit margins increased by more than 20% in the third quarter on a year-over-year basis.
We think equities still have room to run, but market dynamics are likely to shift as the recovery matures. Until now, investors have tended to favor the riskiest areas of the market. But as we move into a new phase of the market cycle, we expect quality stocks (i.e., those with reliable growth models and strong balance sheets) to outperform. At this inflection point, it may not only make sense to favor quality, but for investors to make sure their risk profile is aligned with their tolerance.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC does not offer tax or legal advice.