This Time, Inflation Was the 'Good News'

The latest inflation numbers... Handicapping the Fed's next move... More tariffs started today... Then there's business as usual... For better or worse... What to do in fearful times... Inside the Stock Trader's Almanac...

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Inflation, of all things, soothed the market today...

The recent broad market sell-off has been swift... Through yesterday's close, the tech-heavy Nasdaq Composite Index had fallen more than 12%, and the benchmark S&P 500 Index had fallen 9% in less than three weeks.

But today, we got some respite.

This morning, the Bureau of Labor Statistics released its consumer price index ("CPI") data for February.

It showed inflation rose 0.2% from January and 2.8% year over year. And when stripping out energy and food costs, inflation rose 0.2% month over month and 3.1% year over year last month. All four of those readings came in below Wall Street's estimates.

The year-over-year readings were lower than those from January, marking the first time since last July that both core CPI and headline CPI showed a slowing inflation rate. And core CPI hit the lowest level since April 2021.

Mr. Market appeared to exhale on some good news and reacted in kind. The major U.S. indexes jumped higher on today's open and three of the four held onto gains through closing.

The Nasdaq led, up about 1%. The S&P 500 gained 0.4% and the small-cap Russell 2000 Index was up 0.2% while the Dow Jones Industrial Average finished 0.2% lower.

You could argue that stocks were due for a bounce or a breather and that perhaps today's action was just that. The S&P 500 still remains below its 200-day moving average. We'll need to see stocks climb back above that technical level to be more confident in a turnaround.

Why inflation still matters...

Of course, ever-rising prices always matter to everyone, if in different ways.

For example, as our Stansberry Research senior analyst Alan Gula shared with a group of colleagues today, you may notice your breakfast is still getting a lot more expensive. The "Bacon, Egg & Cheese Price Index With A Cup of Joe" from Bloomberg continued to rise last month and is now up about 68% since 2019.

We're not referring to the fact that everyday Americans are still noticing higher prices at the store, though gas prices have been down lately. What we're talking about is why the inflation story still matters to the market.

Coming up next week, the Federal Reserve will meet to decide its next policy move. And today's CPI release and tomorrow's producer price index ("PPI") data are the most recent numbers the central bank will review while it decides on interest rates.

A significant drop in inflation or a rise in unemployment (the other piece of the Fed's dual mandate) could encourage the Fed to cut rates. And rising inflation or falling unemployment could lead to a rate hike or a longer "pause" in changes.

So far, today's light inflation report hasn't changed the prevailing opinion on the direction of interest rates. According to the CME Group's FedWatch tool, federal-funds futures traders still expect the central bank to hold rates for the next two meetings before cutting in June. And they've put 99% odds that no change will happen this month.

If the Fed were to cut rates next Wednesday, based on what we've heard from Fed officials lately about concerns of reigniting high(er) inflation, we'd be just as surprised as the market.

So, instead of expecting a rate move next week, we're going to keep an eye on what the Fed says about the future path of rates.

Since this is the March policy meeting, the Fed will release one of its quarterly Summary of Economic Projections in which the central bankers share their projections on where they see interest rates, economic growth, and unemployment headed.

As we noted in a Digest last week, there's a disconnect between markets and what we've been hearing from the Fed. Last week's Fed speakers all tried to throw cold water on hopes for a rate cut in the near future. If they do more of this, it could disappoint the market.

And this is entirely possible. It will take more than one month of soft inflation data to move the needle for the Fed. Plus, inflation is still well above the central bank's 2% annualized goal.

What's more, no one knows yet what tariffs will do to inflation. But if February's data is the start of a trend lower, the Fed will start to get more accommodative as the year goes on. If Chair Jerome Powell suggests the path, it would likely be well reflected in stock prices.

Today's moves in the trade war...

With the market up today despite another round of tariff news, we'll take it as a positive sign.

The latest moves today included the European Union and Canada announcing their own tariffs in response to President Donald Trump's blanket 25% tax on steel and aluminum imports that went into effect today.

Canada will add a 25% tariff on more than $20 billion of U.S. goods, including steel, aluminum, computers, sports equipment, and cast-iron products. These are in addition to 25% counter-tariffs that were already in place.

The EU also said today it will tax an additional $28 billion worth of U.S. goods starting in April. European Commission President Ursula von der Leyen told reporters today...

Tariffs are taxes. They are bad for business and worse for consumers. They are disrupting supply chains. They bring uncertainty for the economy. Jobs are at stake, prices [are] up. Nobody needs that on both sides.

But she said that the EU "must act to protect consumers and businesses."

Meantime, Chinese officials are also digging in... like Vice President JD Vance did a few weeks ago in a tense Oval Office meeting with Ukrainian President Volodymyr Zelenskyy. Here's CNBC today...

China is willing to do more to address White House concerns about illicit fentanyl trade, but it will be "a different thing" if ongoing debate over the drug facilitates more U.S. tariffs on the world's second largest economy, an official from the Chinese Ministry of Foreign Affairs told reporters Wednesday.

Washington should have "said a big thank you" to China on what it has done to restrict fentanyl trade in the U.S., the official said via an official English translation, claiming the White House did not appreciate the effort and instead raised duties on Chinese goods twice this year over the drug.

In other words, negotiations are ramping up with the U.S. and China next. It's enough to make your head spin – and has made enough investors sell a lot of stocks in the past couple weeks.

That said, we do see signs of 'business as usual' happening in Washington, too – for better or worse...

Congress is on a path to another "continuing resolution" to fund the federal government at current levels, kicking any serious discussion on budget cuts down the road again.

The Republican-controlled House passed a "stopgap measure" yesterday to keep the government funded through September. It would increase defense spending and funding for veterans' health care, and while it reduces nondefense spending, this amount only drops below 2024 levels.

This might not be something that folks looking for a significant slash to government spending would like to hear... However, it just might be taken as another piece of good news by Wall Street, if one possible uncertainty is taken off the table.

The proposal needs to pass through the Senate to avoid a government shutdown on Friday, likely with at least seven Democrats supporting it, but it sounds like enough are considering voting yes. Of course, it's not hard to think of things not working out, either.

We also mentioned yesterday that the markets got a mid-afternoon lift from reports from Saudi Arabia that Ukrainian officials are open to a ceasefire agreement with Russia. That hope hasn't been scuttled as of now.

Russian President Vladimir Putin hasn't accepted the offer, but the Russians said today they will talk over the details that U.S. officials discussed with the Ukrainians yesterday through formal channels.

At a media availability at the White House today, Trump was asked about possibly pressuring Russia to make a deal. He put financial sanctions on the negotiating table. While sitting next to the Irish Prime Minister Micheál Martin, Trump said...

I can do things financially that would be very bad for Russia... It would be devastating for Russia, but I don't want to do that because I want to see peace. We're getting close to maybe getting something done.

Secretary of State Marco Rubio also indicated yesterday that even the minerals deal that set the stage for the Oval Office blowup with Trump, Vance, and Zelenskyy a few weeks ago is on track to be made. Sounds like things are working out better off camera.

Putting today together...

Stocks indeed took a breather from the volatility we've seen lately.

The CBOE Volatility Index ("VIX") – considered by some as the market's "fear gauge" – fell for the second straight day to around 25. That's higher than it had been for most of the past two years... but still not at historically high levels.

Meantime, the high-yield credit spread, while about 60 basis points higher than it was just a month ago, isn't at what we would consider an elevated level either. That doesn't mean it can't get there, but it does mean that not many debt investors think the entire economy is on the brink of collapse right now.

If you're bullish – or at least expect a slowdown of what is already at minimum a market correction – keep an eye on indicators. A few more days like today, when the S&P 500 and six of its 11 major sectors were higher, will tell us more.

What to do in fearful times...

It may feel counterintuitive, but these times of "fear," as seasoned investors will tell you, can actually present a great opportunity.

Maybe it's simply adding to a long-term position in your portfolio that you already love, a high-quality stock whose valuation has fallen to "cheap" levels, like below a price-to-earnings ratio around 15. Those kinds of opportunities are rare.

Or maybe you just do nothing, and don't sell at the wrong time (which can be a win in the long run).

Or perhaps you want to make a short-term trade...

For example, the market's recent volatility might have you spooked. But one of our top experts, Ten Stock Trader editor Greg Diamond, says it's handing you the perfect setup right now to potentially double your money in as little as one day – just like he achieved 17 times during Trump's first four years in office.

Greg did this despite Trump's first trade war with China... the breakout of the COVID-19 pandemic... and everything in between. Today, he's eyeing up another important turning point in the market and a set of opportunities. (Existing Ten Stock Trader subscribers and Stansberry Alliance members can already find all of Greg's work here.)

If you're interested in learning more about Greg's strategy, click here to find out how you can get started today.

New 52-week highs (as of 3/11/25): Alpha Architect 1-3 Month Box Fund (BOXX) and Wheaton Precious Metals (WPM).

In today's mailbag, feedback on yesterday's edition, which included a discussion on Trump, Elon Musk, and a bear market in the "Magnificent Seven"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I totally disagree on Musk. He is a genius, going into the horrible abuse, fraud, and waste in our government. Of course, a lot of people will be mad to be exposed. He and Trump are fantastic and will save a huge amount of wasted tax dollars." – Subscriber Norm H.

"Kudos to Rick P. on his letter. The U.S. is on the cusp of a financial reset and finally, there are some adults in the room attempting to right the ship." – Subscriber Thomas V.

"What a shame, the greatest stocks of all times [tossed] to the ground by the big money speculators freely operating in our country. Forget about our children's 401Ks, forget about millions of retirees trying to subsidize their income. Our president was asked on this by Ms. Bartiromo the other day. [I] keep hoping the president will do something about this." – Subscriber John S.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
March 12, 2025