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Inflation Cools Again

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Headline CPI comes in cooler … why it wasn’t all great news … the ongoing contrast between the Fed and the markets … where to invest in spite today

Inflation keeps falling.

The big new this morning is that December’s Consumer Price Index (CPI) reading fell 0.1% from November. On a year-over-year basis, headline CPI rose 6.5%, which was down from 7.1%.

Core inflation, which strips out volatile food and energy prices, rose 0.3% month-over-month and 5.7% on the year. These were also cooler readings.

These numbers were in line with estimates coming into this morning, so there were no curveballs thrown our way.

Now, continued cooling in inflation should be a good thing for stocks. But if you were watching the market at the opening bell, you saw a lackluster response from Wall Street. Why?

For that, let’s jump to legendary investor Louis Navellier, editor of Breakthrough Stocks:

Overall, the December CPI report was mixed and will likely cause the Fed to remain somewhat hawkish until housing costs decline.

Even though the overall numbers were in line with estimates, there were a few disappointments – the biggest of which for Louis was housing costs.

Louis had been hoping we would see a decline in owners’ equivalent rent this morning. This category is a major contributor to the overall inflation reading, and the Fed watches it closely.

Unfortunately, rather than a decline, it rose 0.8% in December, up from 0.6% in November. Louis’ take is “there is no CPI evidence yet that the housing market and rental rates are cooling off.”

This appears to be Wall Street’s conclusion too, leading to the ho-hum reaction this morning.

The big question now is “what will the Fed do with this reading?”

As regular Digest readers know, the Fed has been maintaining a tough-talk, hawkish position for months, despite encouraging inflation data.

One of the most important related questions that we’re tracking is “is it all a poker face?”

Well, the “Bond King” Jeffrey Gundlach, CEO of DoubleLine Capital, would answer “yes.”

In an interview with Bloomberg on Tuesday, Gundlach highlighted the growing disconnect between the bond market (which has been behaving dovishly recently) and the Fed (which has been hawkish), and cast his vote for which position investors should believe.

From MarketWatch:

Right now, there’s a gap between where the bond market says interest rates are heading, and where Federal Reserve officials say they’re going — and the so-called bond king says investors should put their faith in markets.

“My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says,” said Jeffrey Gundlach, the DoubleLine Capital chief executive and chief investment officer, in a webcast Tuesday, according to Bloomberg.

If we look ahead, Wall Street believes rates will climb a bit from here, but be lower by the end of the year – down to 4.5%.

But as we’ve been tracking here in the Digest, Fed officials see rates ending 2023 higher than 5%. “Higher for longer” has become the new Fed catch phrase.

In the wake of this disconnect, we’re seeing growing frustration from the Fed

To illustrate, let’s begin with the Fed’s minutes from its December policy meeting.

Here’s Bloomberg:

Federal Reserve officials last month affirmed their resolve to bring down inflation and, in an unusually blunt warning to investors, cautioned against underestimating their will to keep interest rates high for some time.

Going into the meeting, markets were pricing in rate cuts in the second half of 2023. The tone of the minutes of the Federal Open Market Committee’s Dec. 13-14 gathering suggested frustration that this was undermining the central bank’s efforts to bring price pressures under control.

Fed officials noted that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability,” according to the minutes.

Since the December meeting, Wall Steet has been in rally mode, leading some Fed members to express their frustration.

And that brings us to Federal Reserve Bank of Minneapolis President Neel Kashkari and a piece from the New York Times published earlier this week.

From the Times, speaking with Kashkari:

I commented that the financial markets didn’t seem to believe that the Fed would stay the course.

The central bank, in its latest forecast, had projected that the Fed Funds Rate would increase to at least 5 percent and that there would be no rate cuts this year. But the markets were pricing in cuts starting in its second half.

“I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” Kashkari replied.

I said it seemed almost as if the markets were playing chicken with the Fed. Kashkari laughed.

“They are going to lose the game of chicken, I can tell you that,” he said.

The contrast between Gundlach and Kashkari is so stark and contradictory that it’s easy to feel paralyzed.

How do investors respond wisely?

Part of responding wisely is accurately diagnosing the potential opportunity costs of being bullish and bearish today

Yesterday, we discussed this ongoing tension between Wall Street and the Fed, highlighting the perspective of our macro expert, Eric Fry, editor Investment Report.

In short, Eric believes that, regardless of what the Fed does, we’re now in an environment where investors can put their cash to work in expectation of solid and even large profits down the road.

To be clear, he’s not giving a short-term “all clear” for the stock market. So, if you can’t absorb shorter-term losses, Eric’s perspective isn’t for you.

But for a longer-term investor, Eric believes the pros outweigh the cons when it comes to buying into high-quality stocks today.

Here he is with more details:

True, you may invest in a stock that drops another 10%-20% in the current volatility, but it is unlikely you would be looking at the 50% or more shellacking that many stocks have gotten so far in 2022.

Most important of all, there is now a greater chance that short-term losses will reverse and become 10%, 20%, 50%, or even bigger gains in the coming months and years – provided you’re investing in quality stocks, of course.

This echoes a point we’ve made many times in the Digest: Trying to time the market so that you don’t buy until prices have bottomed-out is a fool’s errand.

By definition, a bottom can’t become the bottom until you’re looking at it in the rearview mirror from a higher price.

Given this, we believe the wiser approach is to ask: “If I buy at today’s price, am I likely to make great returns, say, two-to-three years from today?”

If the answer is “yes,” then buying is a good idea, even if prices head lower.

Another way to respond wisely to this contrast between the bond market and the Fed is by investing in sectors that are poised to do well regardless

Last week, Louis held a special live event to detail the one such sector in his crosshairs…

Energy.

From Louis:

The reality is that there’s a big opportunity brewing in the energy sector.

While it began soaring in value in early 2022, I believe oil and gas companies will continue to boast record quarterly results for the foreseeable future.

In fact, I believe the energy bull market that’s coming is going to be the biggest one to date.

The last time I saw a set up like this, back in the mid-2000’s, oil hit $145 per barrel, and many of my energy recommendations exploded for huge gains.

Stocks like Occidental Petroleum for 113% gains… XTO Energy for 287% gains… Sunoco for 97% gains…Tesoro Corp for 150% gains… Valero Energy for 180% gains… Holly Corp for 457% gains… America Movil for 347% gains… and many others.

This time around, I think energy costs could go even higher… with potential gains dwarfing what we saw 15 years ago.

Just this afternoon, Louis released a brand-new recommendation in the energy sector that he believes could become a 10X winner.

Here he is with a few details:

It’s a small cap oil exploration company… and analysts are predicting a massive surge in earnings.

I predict this stock could go on an explosive run, so I suggest you act quickly.