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Stocks rallied hard on Tuesday after new inflation data signaled a possible end to the Federal Reserve’s rate-hiking campaign. However, investors would be wise to not chase the move. The Dow Jones Industrial Average jumped nearly 500 points after the closely watched consumer price index (CPI) reading for October came in flat, softer than economists’ estimate of 0.1% growth month over month. Even better: Core CPI, which strips out food and energy prices, was the slowest it’s been in two years. Wall Street took the news as a sign that inflation was coming down enough for the central bank to stop raising interest rates. After the release, the odds of the Fed not raising rates at its next meeting in December increased from 85.5% to 94.8%, while the odds of a rate cut by March 2024 increased from 10.5% to 28.4%, according to the CME FedWatch Tool. Barring a surprise rebound in inflation, rates seem to have peaked and the “soft landing” for the economy is still in play. For long-term investors like us, that means staying the course by staying invested in stocks. The temptation is to go all in on the good news. As noted in Tuesday’s Morning Meeting , lower rates now and in the future support higher valuation multiples and higher present values of future free cash flows — for those valuing at the market from a discounted cash flow perspective. It’s also a positive for those economic sectors that rely on debt, such as the financials, housing and automotive sectors. Lower rates incentivize more borrowing. Affordability increases with every tick down in rates and as demand for these debt-reliant purchases increases, so does loan origination at the banks. The other tailwind for banks is that the peak in rates should be followed by an explosion in M & A and IPO underwritings, a big win for the investment banking industry. This is all great news and reason to be optimistic heading into 2024. However, we are disciplined investors and the market is overbought, according to our favorite indicator the S & P 500 Short Range Oscillator. Our discipline tells us now is the time to sell, not buy. This explains why we trimmed industrial Emerson Electric (EMR) on Monday and Tuesday and sold some Foot Locker on Friday. We want cash to target those names with stronger business fundamentals. Once some of the froth comes out, we can pick our levels to buy and be ready to pounce. We like to buy stocks when the market is oversold, and sell stocks when there is too much buying. It’s also important to note that we’re not at the 2% level the Fed is targeting, with the CPI headline coming in at 3.2% and the core index coming in at 4% for the 12-month period ending in October. However, the trend looks good and there is a known lag when it comes to the impact of monetary policy. The data supports keeping rates where they are until we get to that 2% or until the disinflation trend we are witnessing stalls out. Perhaps even more important, the shelter index, which we know has been a key metric for the Fed as it thinks about the appropriate path of monetary policy, continues to moderate. It registered a 6.7% year-over-year increase in October, down from a 7.1% annual increase in October and the lowest rate of advance since November 2022. This key sub-index represents about 35% of headline CPI. It’s so closely watched because it represents a very large and unavoidable cost for Americans that take precedence over almost all other expenses. As a result, affordability here is key to spending power elsewhere and therefore the economic health of the country. We are indeed a consumption-based economy — remember, roughly 68% of GDP is attributable to private consumption — so this the drop in the shelter index may be the most important nugget in all of the good inflation data released Tuesday. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Customers shop at a supermarket in Foster City, California, the United States, Sept. 13, 2023.
Xinhua News Agency | Xinhua News Agency | Getty Images
Stocks rallied hard on Tuesday after new inflation data signaled a possible end to the Federal Reserve’s rate-hiking campaign. However, investors would be wise to not chase the move.
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