Here’s the current state of the economy and what it means for the stock market

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  • The headline inflation rate for December fell to 6.5% from 7.1% in November on an annual basis. While this information isn’t exactly worth celebrating, it is a sign that things are going in the right direction as it shows that higher prices are slowing the economy.
  • Investors look at the CPI data because if inflation drops, there is hope that the Fed will slow down as aggressive interest rate increases have made borrowing more expensive.
  • With inflation numbers falling and the economy adding jobs last month, we will now have to wait and see how the Fed will react in February at the upcoming FOMC meeting, as many analysts expect a rate hike of 0.25%.

The latest Consumer Price Index (CPI) data was released last Thursday and immediately affected the stock market. The December Consumer Price Index report showed that headline inflation fell by 0.1% and the year-over-year inflation rate was 6.5%. despite of Inflation rate Calm down, it’s still too early to celebrate as we have to see how the Fed reacts to all this data. Further price hikes could be on the horizon.

We’ll take a look at what the latest CPI inflation data says about the state of the current economy and what this means for the stock market going forward – plus how Make use of Q.ai for help.

What is the current state of the economy?

the most recent Inflation data Consumer price index He noted that interest rate hikes have finally slowed the economy, as inflation was at 6.5% year-on-year in December compared to 7.1% in November. While the overall rate of inflation fell 0.1% from November, overall prices were still up 6.5% year-on-year. The core CPI, which excludes volatile items such as food and energy, rose 0.3%, which was what analysts had expected.

Prices are finally starting to fall after the post-pandemic boom. When the world began to open up, there was an unprecedented increase in demand that could not be compared with the supply in the economy. The pent-up consumer demand to return to normal supply chain issues and the tight job market drove up the prices of everything. Consumers are beginning to notice that inflation is hurting their purchasing power, but it wasn’t until early 2022 that it became clear how serious the situation was.

Initially, central banks concluded that inflation was temporary due to unique circumstances. Then it eventually became clear that inflation was on the rise and that raising interest rates should begin to restore the balance of supply and demand to a reasonable level. Analysts have been paying attention to labor market data and the consumer price index to see how the economy responds to aggressive interest rate hikes.

It is worth noting that the inflation data came after the Labor Department reported that the US economy added 223,000 jobs in December, above economists’ expectations of 200,000. Management also reported that wages rose 4.6% year-over-year in December, but with inflation soaring, employees did not see this wage increase as a net gain in their purchasing power.

The December CPI data is positive news in the sense that we are past the peak of inflation. However, we now have to worry about how the Fed will respond as we are nowhere near the target inflation rate of 2%. This means that the next few price hikes may be smaller, but there is no way of knowing how the stock market will react to the upcoming FOMC announcement.

What is the impact of the inflation report on the stock exchange?

The stock market usually reacts to inflation data before it is released based on analysts’ expectations, and then the market responds again once official results are released. The inflation report was released in the morning hours of January 12, and stocks closed higher on news of slowing inflation for December.

Here are some key highlights from the stock markets at the close on the day of the January 12 inflation report:

  • The Dow Jones Industrial Average rose 0.64%, gaining 216.96 points
  • The S&P 500 rose 0.34% to end the trading day at 3,983.17.
  • The Nasdaq Composite Index rose 0.64%, to 11001.10

It should be noted that this was the first 5-day winning streak for the technology sector since July, as this section of the market has been suffering recently. Investors responded positively to the inflation data because if prices fall, it will likely lead to a slowdown in the Fed as it raises interest rates, which will help us avoid entering a recession in 2023 (in the best case scenario).

What does this information mean for the stock market?

Inflation data live It affects the stock market Because consumer spending and profits are linked to inflation data. When consumers spend less money on goods and services, companies report lower profits, which hurts stock prices. When stock prices fall, it hurts investor confidence. In this instance of the latest data, investors saw it as a sign that inflation may finally subside and rate hikes may slow. The combination of low inflation and paused hikes in interest rates may indicate that consumer spending will return to normal.

During periods of high inflation and rising prices, growth stocks and companies offering discretionary products drop dramatically. If consumers are concerned that prices are too high or that we may enter a recession, they are less likely to spend money on items that are not considered essential.

What’s next for the stock market?

Both inflation data and a labor report will be released in December 2022. The next step is to see how the Fed will react to what was announced at the upcoming FOMC meeting, which is scheduled for January 31st and February 1st. Consider regarding inflation and stock market data.

The beginning of earnings reporting season

It’s that time of year when companies will begin reporting their earnings for the fourth quarter of 2022. As we’ve covered extensively in previous articles, many companies have warned investors of lower earnings during the holiday season due to a shift in consumer spending habits. With rising inflation and fears of a recession, many companies expected to report lower earnings.

When the earnings reports are released, we’ll see how the stock market reacts to the lower numbers. While lower earnings should be expected, that doesn’t mean investors won’t be quick to start selling stocks again. Further selling in the stock market based on lower earnings reports will send the market lower at a time when there were signs of a slow recovery.

Our recession fears still loom large

The possibility of a recession is still out of the question. As the Federal Reserve continues to raise interest rates to slow inflation, there is always the possibility of tipping the entire economy into recession. While many experts have expected the US economy to be officially in recession for 6 months now, the National Bureau of Economic Research (NBER) has determined that we are not officially in recession yet.

If the price increase succeeds in bringing the economy into a recession, we will see additional selling in the stock market. There is no prediction of how far the market can go down as investors tend to save money during a recession due to fears that they may lose their jobs. .

How should you invest?

Trying to decide which stocks to invest in can be intimidating at the best of times. When inflation rises and central banks respond by raising interest rates, there is a lot of volatility in the stock market that makes it hard to be an investor.

If you are concerned about investing during times of high inflation, we suggest you take a look at this Q.ai’s inflation group. We use the power of artificial intelligence to predict and adjust positions in this diversified portfolio of assets designed to mitigate rising inflation risks. You can also run Wallet protection To further protect your money in times of high market volatility.

bottom line

While inflation peaked year-on-year in June at 9.1%, we are still far from our target rate of 2%. This means that we may still see volatility in the stock market as the economy continues to respond to higher interest rates and CPI data. All we can do now is monitor the situation to see how the economy responds.

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