Inflation Cools & Stock Portfolio Update: Easy Inflation Comps Ending By: Christopher Mistal | July 13, 2023 | Email | Print

NASDAQ’s midyear rally hit a soft patch at the start of the month, but as of today’s close it has gained 4.3% since the close of trading on the fourth from last trading day of June. NASDAQ has historically averaged 2.4% over the 12-trading day span that defines its midyear rally. The midyear rally officially ends on the close tomorrow, July 14. The end of the midyear rally often coincides with the start of typical second half of July weakness. This year the rally could persist a bit longer, but it will likely pause before the Fed meets again on July 25 and 26.

 

This year’s midyear rally was kicked into overdrive by a softer than expected June jobs report followed by better than anticipated readings of CPI and PPI. A softening labor market and cooling inflation are widely regarded as the key metrics the Fed is monitoring for signs of when it may stop raising interest rates. This month’s data appears to support the assumption that the Fed’s inflation war could be nearing an end. But it may not yet be time to begin celebrating or to jump back into tech stocks.

 

 

In the above chart we can see the 12-month change in CPI (consumer price index), PPI (producer price index) and PCE (personal consumption expenditures). PPI peaked in March of last year while CPI and PCE peaked three months later in June. In the 12 months since the June peak in 12-month CPI and PPI, comparisons were getting easier and easier as the 12-month ago reference rapidly accelerated up the left side of the dome. Going forward the reference for the 12-month period will not be climbing as quickly. As a result of this, there is essentially only one path to a 2% or lower 12-month CPI anytime over the next year.

 

 

In the above chart we have plotted the 12-month historical change in CPI from January 2020 through its most current reading for June 2023 (black line). From the current level we have projected CPI out 1 year based upon monthly increases of 0.1%, 0.2%, 0.3%, 0.4% and 0.5%. To achieve the Fed’s stated 2% annual inflation target, CPI will need to be no more than 0.1% higher per month in each of the next six months. If this were to happen CPI’s 12-month change would be under 2% in January 2024. If monthly changes in CPI hover around 0.2%, it will reach a low in February 2024 and move sideways. Any consistent monthly increases above 0.2% results in 12-month inflation accelerating higher again. It is also notable that all five projections produce an increase next month.

 

Market confidence and sentiment may be on the rise and bullish now, but the path back to 2% annual inflation looks murky and the Fed could be forced to either remain hawkish longer or accept a higher level of inflation going forward. With crude oil rising from under $70 per barrel in late June to over $77 today, pressure is already mounting on July’s inflation metrics. The Fed could easily disappoint the market later this month and be a catalyst for choppy, volatile trading in August and September and possibly into October.

 

 

Over the last five weeks since the last update through yesterday’s close (July 13), S&P 500 advanced 2.4% and Russell 2000 advanced 4.8%. Over the same period the entire portfolio climbed 1.0% higher, excluding dividends and any trading fees. Mid-cap positions once again contributed the most, up 9.9% while small caps and large caps advanced 5.0% and 1.3% respectively. Although the overall portfolio gain was modest over the last month, it was sufficient to push the portfolio to a new all-time high.

 

AI-related stocks, Super Micro Computer (SMCI) and Axcelis Technologies (ACLS) remained the stars of the portfolio. Both traded at new all-time highs recently. SMCI closed at a new all-time high today and ACLS did the same on June 30 and remains close to that level today. Accounting for selling half of the original position when ACLS and SMCI first doubled, they were up 115.1% and 168.8% respectively on July 12. SMCI is also the largest holding in the Russell 2000 index. SMCI and ACLS are on Hold. Suggested stop losses have been updated to reflect recent gains.

 

Large-cap healthcare stocks, Elevance Health (ELV) and UnitedHealth Group (UNH) continued to struggle over the past month. ELV closed below its stop loss on July 12 and was closed out today. UNH closed below its stop loss today. UNH is scheduled to report earnings and hold a conference call tomorrow morning before the market opens. It would likely only take a modestly positive outlook to push shares back above $450. If UNH can reclaim that level and close above it, we will not close out the position. However, if UNH does not bounce, it will officially be closed out on Monday, July 17.

 

All positions not previously mentioned are on Hold. The “Worst Months” are here, and NASDAQ’s midyear rally officially ends tomorrow. Inflation metrics have been trending lower, but with energy on the rise again that trend could be challenged which in turn would be a headache for the Fed and then the market.