Editor's note: Following the herd is an easy way to get burned...
Inflation figures for October came in better than expected, spurring a brief rally in the markets. But with the Fed determined to keep hiking rates, this short-term boost doesn't change the long-term outlook for the economy.
That's why Karina Kovalcik, senior quantitative analyst for our corporate affiliate Chaikin Analytics, says it's critical for investors to keep the Fed's aggressive rate-hike strategy in mind when searching for buying opportunities...
In today's Masters Series, adapted from the November 15 issue of the Chaikin PowerFeed daily e-letter, Karina details how the most recent inflation data could impact the Fed's inflation-fighting strategy... explains how this could cause today's rampant market volatility to drag on... and discusses the long-term repercussions of the Fed's next move for investors...
This Is Likely the Fed's Next Move
Don't let the market's gut reaction fool you...
As Chaikin Analytics founder Marc Chaikin recently told his subscribers, the Consumer Price Index ("CPI") update for October was better than expected. And stocks ripped higher on the news.
Sure, the latest inflation numbers beat expectations. But they still weren't good.
That's a big problem...
You see, the Federal Reserve's target inflation rate is 2%. However, even after last week's good first step, inflation still sits at 7.7% year over year.
So now, the real question is... what does all of this mean going forward?
Let's take a closer look...
First, we need to know what actually happened with inflation in the most recent report...
The media makes the story about a single number – the overall CPI. That number represents the average increase in price of all items bought since last year (or last month).
But you can also look at all the items individually...
For example, the cost of fuel oil jumped about 20% over the past month alone. It's up almost 70% in the past year. The cost of food was up about 11% in the past year. And shelter costs were up around 7% in that same period.
These numbers are all part of the overall CPI. And you can see that it gets complicated quickly. That's why the media tries to focus on a single takeaway.
With that in mind, here are the basics we need to know...
These numbers show that we've taken a step in the right direction.
However, investors are running on "hopium" right now. They're tired of bad news. So they're latching onto every little piece of good news.
It's great that inflation rose less than expected in October. That's why investors got excited.
But now, we need to pay attention to what happens next...
If the CPI rises next month, watch out. That would likely cause the market to crash in a similar amount to its roughly 6% jump over the final two trading days last week.
Consumer sentiment is a critical indicator to watch, too. If it crashes and demand for goods also drops, that could signal that we're headed into a deeper recession. A third factor is worth watching as well...
Until a sustained drop in inflation occurs, the Fed can't afford to stop hiking interest rates.
The next CPI release is scheduled for December 13. And importantly, the Fed's regularly scheduled meeting about interest rates will happen the next day.
With where inflation is right now, the Fed can't afford to not raise the federal-funds rate again. As we said earlier, it's about five percentage points higher than the Fed's target.
Now, let's say the inflation numbers come in higher for November. It would indicate that October's reading was just a fluke. And you can guess what would happen in that case...
The Fed would raise interest rates.
So short of massive disinflation next month, the Fed's next step is pretty clear. And it looks a lot like all the recent steps...
The Fed is going to raise rates again in December.
By now, you know that's not good news for stocks. And it means volatility will continue.
Good investing,
Karina Kovalcik
Editor's note: Ongoing volatility isn't the only issue in the markets to be concerned about moving forward. In fact, things could get much worse from here...
That's why Marc Chaikin, founder of Chaikin Analytics, hosted a special online event earlier this week to discuss a major shift that's coming to the U.S. financial system – one that could help investors double, triple, or even quadruple their life savings. And you don't want to miss the free recommendation he gave away. Click here to watch the full replay...