Bulls on parade after CPI shows slowing inflation
Stocks surged as investors bet that the Federal Reserve is done raising rates and could even start CUTTING as soon as early next year. Is this an early start to the typical year-end Santa Claus rally?
Looks like the Santa Claus rally is starting a little early this year. Stocks surged Tuesday after the US government reported a continued slowdown in the rise of consumer prices. Overall CPI was up 3.2% year-over-year through October, a marked decline from the 3.7% inflation rate in the 12 months ending in September. What’s more, the so-called core consumer price index, which excludes food and energy costs, was up “only” 4% YOY. That’s the smallest increase since September 2021.
So is inflation no longer a concern? Not exactly. Prices are still rising at a higher than usual clip…and many consumers are not happy about that. But the trend is clearly going in the right direction, which means the Federal Reserve is probably done raising interest rates. That’s why stocks soared Tuesday. The Dow was up more than 500 points, or 1.6%. The S&P 500 and Nasdaq each gained more than 2%. Several blue chips, including Microsoft, Dell, Walmart, Broadcom, home builders Pulte and Toll Brothers, UGG and Hoka shoe maker Deckers Outdoor, Ferrari and Chipotle even hit new all-time highs.
Investors are not only betting that the Fed hawks are done hiking rates; the market is even starting to price in a small chance of a rate CUT as soon as March. That might be an overly ambitious expectation. But if the pace of consumer price increases continues to cool AND we start to see a slowdown in hiring, wage growth and other parts of the economy (particularly housing and consumer spending) then the Fed might look to ease sooner rather than later in order to try and achieve the mythical soft landing for the economy and avoid a recession.
Sticking the soft landing may not be easy…and Fed chair Jerome Powell still sounds like he’s more worried about inflation than a recession. But for now, investors don’t seem too concerned. We’ll see if the early holiday optimism is misplaced or if Wall Street is correct to start acting like it really is the most wonderful time of the year.