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US inflation spikes, so why didn't Wall Street panic?

Peter Switzer
14 February 2018

Inflation in the US came in stronger than expected but Wall Street didn’t panic. How come?

Maybe the answer is that the Yanks have worried enough and taken down stocks sufficiently for the inflation that has shown up so far. But the whole experience since two Fridays ago, when both great employment and wage numbers screamed that inflation was on the rise and, therefore, US interest rates should rise quicker than was expected, justifies the maxim that where there’s smoke there’s fire.

Yes, I know it’s an oldie but it’s often a goodie, as the overnight inflation number in the States proved. However, using the smoke analogy to assess how much we should be worried about it, currently makes me OK with it.

So the inflation worries were legitimate and, therefore, the fear of faster rising interest rates in the US was a good call but the overnight stock market reaction, which was positive before the close, suggests Wall Street has done all the panicking it needs to do, for the moment.

I would’ve expected the revelation that a consumer price index rise of 0.5% in January, when economists in a Reuters survey expected a 0.3% lift, might have reignited some market panic of the kind we saw a week ago. Possibly the 10% plus drop in the Dow Jones index was enough for now and, interestingly, both tech and bank stocks were higher after the news, which is a sign that higher interest rates are not going to derail the US economy, at least in the short term.

This is quite rational, given most thought there were going to be at least three interest rate rises there this year. The number has increased to four or five but as long as the real economy looks strong, the stock market is likely to cope with a bit more inflation.

That said it, and how quickly the Fed decides to raise interest rates is set to give us a lot of volatility in the stock market this year. So get used to big, bold headlines about stocks.

One important reason why the US stock market might be done with panicking, at least for the moment, is the news from company reporting season in the States. And it’s pretty damn good.

Right now, they’re 70% through reporting and earnings for US companies are up 14.8%, with revenues 8% higher. And this is the best in almost five years!

But that’s not all. 2018 trends are looking really good, with all four quarters ahead expected to deliver better results, which is quite unusual.

Source: Trading Economics

Given the above expectations, I guess I can pretty confidently re-use the old “where there’s smoke, there’s fire”, with the smoke of good company reporting saying the US economy is on fire and so is the related corporate sector. And the chart above of the S&P 500 index graphically shows that hot economy and corporate sector.

The big watch this year will be how fast inflation picks up and this will have a big impact on how fast interest rates go up. This, in turn, will affect the rise of stock prices and how much panicky volatility we’ll see.

Our stock market could easily outperform the US market this year but we need Wall Street to keep on heading higher to ensure panic doesn’t get in the way of my expected comeback for both the Oz economy and our stock market.

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