US CPI: Investors look through near-term squalls, focus on earnings

Month-on-month inflation reports and the Federal Reserve’s responses won’t fixate investors, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.

Nigel Green of deVere Group’s warning comes as a new report on U.S. inflation reveals the annual rate of price increases was 6.4% in January following a decline to 6.5% in December. More broadly, inflation has cooled from a 40-year high of 9.1% in June 2022.

He says: “It’s slightly higher than most analysts had expected, but it’s nothing too dramatic. All other reports were in line with expectations. 

“It should also be noted that different calculation metrics were used this month.

“There has been a shift as markets are now betting on a longer period of higher interest rates as they begin to take heed of the message from U.S. Federal Reserve officials that there’s still a way to cool inflation in the face of a robust labour market.

“The tight labour market is a headache for the Fed, as it contributes to strong wage growth. However, Fed Chair Powell made clear last week that embedded inflation, caused by wage growth, is not yet a problem.”

The deVere CEO continues: “Despite the higher-than-expected inflation print, it’s clear to investors that we’re far closer to the ‘home run’ now.

“I think investors will, sensibly, be prepared to look through any near-term squalls on inflation and interest rate news.

“Instead, rightly, they will be focused more on earnings. Fourth-quarter 2022 earnings have fallen from a year ago, now a decline in the first quarter of 2023 would push the S&P 500 into an earnings recession.” 

This, says Nigel Green, will be more front and center in investors’ minds. 

“They are less fixated on the month-on-month inflation reports and the Federal Reserve’s response.

“Inflation seems to have peaked and investors are looking to the future, not in the rear-view mirror.”

As we move past peak-inflation, it’s critical that investors ensure their portfolios are suitably diversified across asset classes, sectors, currencies and regions, so as to make the most of the considerable opportunities that will inevitably present themselves.

“As the economic cycle moves ahead, and economies readjust, there will be big winners and big losers – it’s about being invested in the right companies, those which can consistently maintain or steadily grow margin, as well as diversification across sectors, asset classes and regions.

“A good fund manager will be critical in identifying these winners and losers as the economic cycle moves on,” affirms the deVere CEO.

He concludes: “As we’re seeing, some companies are struggling to maintain margin and are failing to report as had been expected. 

“This is now a bigger deal for investors looking to build wealth than individual inflation reports.”