By John Lau,
November 16, 2022 – This is a question people are asking following last week’s CPI report and the big rally in stocks.
I know many people read the Wall Street Journal and watch CNBC and Bloomberg Market News, so you knew that CPI had come in under expectations and stocks had surged.
But can you determine from those articles and talking points what it all meant for markets?
Stocks posted strong gains last week thanks to positive fundamental news, highlighted by the lower-than-expected CPI report. So, given the recently resilient market and the clear improvement in inflation trends, it makes sense to ask the question: Was the CPI report a bullish gamechanger?
Unfortunately, the answer is: No. Not yet. And let me explain…
Thursday’s CPI was absolutely the best fundamental news this market and investors have received in a while, and it is undeniable that over the past few weeks there has been some real positive macroeconomic progress, as the UK PM induced Truss-o-nomics-spike in yields has now gone away, the mid-term election is over and the U.S. will have a split government, and inflation indicators are starting to decline. While these are positives, they are still a long way from determining that 1) Inflation has been defeated, 2) The Fed has pivoted towards less-hawkish policy, 3) China is functioning “normally” again and 4) Geopolitical risks are easing (via a Russia/Ukraine ceasefire). Yes, the recent run of good news has increased the chances of an economic soft landing, but it in no way makes it the widely expected outcome (there are still a lot of risks in this market).
Consider this from an abstract standpoint: The best way for stocks to bottom is for the Fed pivot to lead to a decline in Treasury yields. As yields decline, the market multiple can rise (perhaps to 17X-18X). That needs to happen to support stocks because the real economy is rolling over and earnings are falling. To that point, for the past eight months, yields have risen and the market multiple has declined. But a resilient economy and solid earnings have helped to support stocks amidst historic rate hikes. Now, the opposite has to occur. As the economy and earnings buckle under the weight of rate hikes, the Fed needs to signal an “end” to the campaign (i.e. the pivot) and in doing so rising multiples will offset falling earnings and slowing growth. Last week’s CPI took us a step closer to that reality, but we’re still a long way from it actually occurring.
From a market standpoint, if we consider seasonality (Santa Clause rally) and positioning (investors underweight stocks), we may see the S&P 500 rally through 4,000 on momentum. But we would not chase that rally as one good CPI report doesn’t mark the end of inflation or a Fed pivot, and we would need more data points for confirmation and continue to use any material rally in stocks to ensure portfolios are suited for continued volatility. Bottom line last week was good and CPI was a welcomed report, but a lot more work needs to be done before we can say the bottom is “in” for this market and to aggressively add long exposure.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Was the CPI Report a Bullish Gamechanger?
By John Lau,
November 16, 2022 – This is a question people are asking following last week’s CPI report and the big rally in stocks.
I know many people read the Wall Street Journal and watch CNBC and Bloomberg Market News, so you knew that CPI had come in under expectations and stocks had surged.
But can you determine from those articles and talking points what it all meant for markets?
Stocks posted strong gains last week thanks to positive fundamental news, highlighted by the lower-than-expected CPI report. So, given the recently resilient market and the clear improvement in inflation trends, it makes sense to ask the question: Was the CPI report a bullish gamechanger?
Unfortunately, the answer is: No. Not yet. And let me explain…
Thursday’s CPI was absolutely the best fundamental news this market and investors have received in a while, and it is undeniable that over the past few weeks there has been some real positive macroeconomic progress, as the UK PM induced Truss-o-nomics-spike in yields has now gone away, the mid-term election is over and the U.S. will have a split government, and inflation indicators are starting to decline. While these are positives, they are still a long way from determining that 1) Inflation has been defeated, 2) The Fed has pivoted towards less-hawkish policy, 3) China is functioning “normally” again and 4) Geopolitical risks are easing (via a Russia/Ukraine ceasefire). Yes, the recent run of good news has increased the chances of an economic soft landing, but it in no way makes it the widely expected outcome (there are still a lot of risks in this market).
Consider this from an abstract standpoint: The best way for stocks to bottom is for the Fed pivot to lead to a decline in Treasury yields. As yields decline, the market multiple can rise (perhaps to 17X-18X). That needs to happen to support stocks because the real economy is rolling over and earnings are falling. To that point, for the past eight months, yields have risen and the market multiple has declined. But a resilient economy and solid earnings have helped to support stocks amidst historic rate hikes. Now, the opposite has to occur. As the economy and earnings buckle under the weight of rate hikes, the Fed needs to signal an “end” to the campaign (i.e. the pivot) and in doing so rising multiples will offset falling earnings and slowing growth. Last week’s CPI took us a step closer to that reality, but we’re still a long way from it actually occurring.
From a market standpoint, if we consider seasonality (Santa Clause rally) and positioning (investors underweight stocks), we may see the S&P 500 rally through 4,000 on momentum. But we would not chase that rally as one good CPI report doesn’t mark the end of inflation or a Fed pivot, and we would need more data points for confirmation and continue to use any material rally in stocks to ensure portfolios are suited for continued volatility. Bottom line last week was good and CPI was a welcomed report, but a lot more work needs to be done before we can say the bottom is “in” for this market and to aggressively add long exposure.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
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