Market Update: Inflation Down

Stocks & Cryptos Up

Stock market rallies to lowering inflation, crypto tagging along

Like dominoes, one event leads to another, which leads to another and here we are, at a point where the market is rallying with joy – stock traders prancing here and there seeking to profit from the bullish market.

 

Perhaps the market is healing, or is it a euphoria that is soon to fade?

Where it all started

Looking at the core of last week’s market rally, it all started with one of the key elements that drive consumer inflation up and down – gasoline. It’s used in almost everything consumer-related, and thus its price movements will usually be reflected in the consumer price index (CPI).

 

What happened recently is that gasoline prices have been going down from their June 2022 peak ($5.107/gal) to a low in December 2022 ($3.203/gal), followed by a slight increase in early 2023 at around $3.350/gal.

Image source: YChart

With cheaper gasoline come cheaper products. A recent January 12th CPI announcement saw a -0.1% decrease in monthly consumer inflation, whereas a YoY comparison, is in line with estimates at 6.5%. 

All of these breeds optimism among market participants, with hopes that interest rates will move down with time, which is then translated into a bull market rally.

Bull on the run

The air around the market recently has been seeing a gleeful rally given the recent CPI announcement. A contagious frenzy of buys and sells, with many looking green.

First, looking at the market indices, S&P 500 showed a 0.40% increase a day after the CPI announcement was made. On the day itself, S&P 500’s trading volume saw a 3.181% increase from the previous day.

The Dow Jones (DJIA) saw a 0.33% increase after the CPI announcement with trading volume increasing by 2.168% on the day itself.

The Nasdaq composite index saw a 0.71% increase a day after the announcement was made. Nasdaq saw the most increase in trading volume at 7.509%. Relatively speaking, Nasdaq also managed to lead in terms of gains (by percentage).

 The Russel 2000 index saw a 0.58% increase in value a day after the announcement, while on the day itself, its volume saw a 3.181% increase. 

 

All in all, the stock market across the four main indices is all looking at a green mark, with Nasdaq taking the lead in terms of value and volume. There is also an average of 4.01% increase in trading volume on the day that the CPI announcement was made (compared to the day before), an indication that more and more are hyped up having seen the prospect laid down in the recent CPI announcement.

Crypto tags along

As the stock market rallies on greens, the crypto market (which is usually associated with the stock market and growth stocks) seems to be heading towards a good direction as well.

 

Many of the well-known cryptos are looking at a good rally.  

 

Ethereum (ETH), as of the time this article was written,  is looking at a 30.77%  jump from its price on January 1st, 2023. Bitcoin (BTC), on the other hand, jumped by 24.21%, reaching its $21,000 mark that it hasn’t seen since November 2022. Binance Coin (BNB) saw a 24.61% increase in its value, despite slanting a bit from its peak on January 14th by 0.5%. 

 

This can also be associated with the recent news that FTX liquidators managed to get a hold of $5 billion to be returned to users, thus, gaining back some of the confidence that was once lost from the crypto market.

FTX recovers $5 billion in cash and crypto to repay customers

Collapsed cryptocurrency exchange FTX says it has recovered more than $5 billion worth of cash and crypto assets it may be able to sell to help repay customers and investors, an attorney for the company told a Delaware bankruptcy court on Wednesday.

Now that we mentioned FTX, perhaps it is also good to mention Solana (SOL) which took one of the heaviest blows from FTX’s scandal. Recently, Solana’s price rose to around $23.20 as compared to $9.9 at the beginning of this year – that is around twice the price! Well, not as good as how it was, but it is something.

Is it really what it seems like?

Falling inflation is always generally welcomed these days. It means good news for the consumers – cheaper goods, lesser cost, and better bargains. However, consumers and retailers may not always share the same sentiments, especially after the recent Employment Situation Summary release.

 

Before we move any further, it would be preposterous not to address those that earn the most from the news as good as this – the politicians!

From the recent tweet by Biden himself, we can see that there are two main concerns right now, inflation and wage – or rather we say employment.  Both of these concerns are looking to head in a good direction.

 

However, there is one main concern surrounding this dynamic. Will it be good for the stock market itself? 

 

The reason behind that question is that companies may be looking at a squeezed profit, whereby if inflation goes down while wage remains strong, companies are looking to sell at a lower price while having to pay for higher wages. 

 

However, there are a few concerns with regard to the concern above, or shall we call it a concern-ception? 

 

First, will companies actually be looking at deflation? Despite the promising -0.1% shown by the CPI report, many experts are still predicting that inflation will soar higher than usual, only that it may not be as bad as it was.

“Investors should still be wary to expect a Fed pivot at this point. Consumers will continue to feel the effects of higher-than-average inflation for the near future, but we are starting to see a glimpse of better days on the horizon.”

Ben Vaske, investment research analyst at Orion Advisor Solutions. Tweet

Second, companies will also look at demand uncertainties as we move forward, given that the world is recovering from a crisis (COVID-19), living in one (Russia-Ukraine war), and may be seeing more as we go (China COVID surge, China-Taiwan threat, and North Korean threat). 

 

In this situation, companies whose product prices are highly susceptible to changing demands or supplies may look to take the blow from any ensuing crisis. Thus, it is important to be prepared and look for companies whose prices are not severely affected by any shock. 

 

Last but not least, it is better to be ready than to completely put aside the fact that recession may still be looming around. First, we have to admit that the 6.5% inflation mentioned is something to cheer for. However, we have to move to the second step, which is to admit that the inflation crisis is not yet over.

 

Despite the CPI showing a cheerful disinflation, real average hourly earnings which contribute to inflation have been showing a 0.36% rise from October 2022 to December 2022. 

Well, we are not saying that triggering a recession is the only way out of inflation, but we’d say that it seems the way that some of those up the hills would prefer. We are also certainly not saying that inflation will remain a crisis – we are simply preparing you for the possibilities.

Key Takeaways

  • Recent CPI reports have been showing a promising rate of YoY inflation (6.5%).
  • The stock market anticipated a halt on interest rate hikes, thus causing a bull rally.
  • Crypto followed suit, aside from having regained some confidence when liquidators managed to retrieve $5 billion for FTX’s users.
  • Disinflation paired with strong and high wages may be bad for companies in terms of profit.  
  • Despite the promising CPI report, it is better to be prudent about the possibility that a recession may still happen.

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