January Inflation and Stocks: Is the Bull Market Finished?

When the market is greedy, that’s when it’s the most vulnerable. However, greed is quickly flipping to fear today as the January Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS) indicates that U.S. inflation is unexpectedly stubborn.

“Sticky” inflation has a broad range of implications, very few of which are positive for the economy and financial markets. Among the most impactful considerations is how persistent inflation will affect the mindset of the Federal Reserve and its chairman, Jerome Powell.

With the release of January’s CPI print, greedy stock-market investors may have to rethink their optimism and adjust their portfolio strategies. Thus, just one month’s inflation data could have year-long ramifications — even beyond the “sticker shock” of higher prices for a variety of essential goods.

Inflation is slowing… but not fast enough

For stock investors, the January CPI report is a good-news/ bad-news scenario. However, the bad news outweighs the good news.

Starting with the positive news first, headline inflation appears to be slowing on a month-over-month basis. Specifically, January’s CPI increased 3.1% year over year; in contrast, December’s CPI indicated a 3.4% increase.

Just to be clear, this doesn’t mean that commonly purchased products and services will be less expensive. It only means that the rate at which things are getting more expensive is slowing down. In other words, this isn’t deflation; it’s just disinflation.

That’s pretty much where the good news ends. January’s CPI rose 0.3% month over month, indicating acceleration compared to December’s 0.2% month-over-month CPI increase.

Economists had hoped for more encouraging stats than these. Specifically, they had expected January’s CPI to increase 2.9% year over year and 0.2% month over month.

It seems falling energy prices were the only thing that kept the January inflation report from being much worse than it actually was. In January, energy prices declined 4.6% year over year and 0.9% month over month.

Besides energy, the prices of practically all other essential categories increased in January. Shelter costs moved 0.6% higher month over month and 6% year over year. Unfortunately, food prices increased 0.4% month over month, while the price of car insurance rose 1.4% month over month. Meanwhile, the cost of medical care in the U.S. moved up 0.5% compared to the prior month.

For what it’s worth, the average price of a new car or truck didn’t change. However, that’s not much consolation for struggling Americans, many of whom can’t afford a new vehicle.

The market gets a reality check

While the implications for everyday Americans on Main Street run deep, there are also consequences today on Wall Street. After all, it was only a month or two ago when the majority of investors had assumed that the Federal Reserve would cut interest rates at least half a dozen times this year, starting in March.

The stock market wasn’t bothered much when the Fed chose not to reduce interest rates in January. Stock traders counted on a March rate cut, but that’s perceived as less likely now because inflation isn’t cooling quickly enough.

Suddenly, the market is reminded of Powell’s previous, not-so-subtle warnings. Not long ago, the Fed chairman signaled that an interest-rate cut at the March meeting isn’t likely and isn’t in the Federal Reserve’s base case.

Those hints from Powell weren’t enough to stop the relentless ascent of the S&P 500 (SPX) and especially the NASDAQ 100 (NDX), with a handful of mega-cap technology stocks propelling these market-cap-weighted indexes higher.

Today, investors are evidently more cautious as they consider whether the market may have gotten ahead of itself. Stocks are particularly vulnerable, as the bull market’s foundation has largely been the assumption of near-term rate cuts.

If you really want to see how the market feels about today’s CPI data, take a look at how bond traders are reacting. The 10-year U.S. Treasury bond yield is up nearly 2.5% to 4.28% as traders fear the prospect of higher-for-longer interest-rate policy.

Regan Capital Chief Investment Officer Skyler Weinand envisions the bond-yield melt-up continuing while the Fed remains hard-pressed to start cutting interest rates in March.

“Bond yields have not peaked, and we believe that a 10-year Treasury yield with a 5-handle is more likely than a 3-handle in 2024… Persistent inflation, full employment and strong growth may delay the Fed’s rate cuts,” Weinand warned.

That’s a warning for overly optimistic stock traders to carefully consider today. After weeks and months of baked-in assumptions, a reassessment — painful as it may be — is long overdue.