Investors are closely watching for any signs that the rise in the cost of living during the pandemic may be starting to subside, with the Wells Fargo Investment Institute among financial firms pointing out possibility of relief in front.
“Inflation is in the process of peaking,” Scott Wren, senior global market strategist at Wells Fargo Investment Institute, told MarketWatch in a phone interview. The recent drop in the price of raw materials for finished products could be an indication of that, he said, as the rise and fall in finished product costs often drags on the prices of raw materials with a lag.
Raw material prices may have “peaked,” says Wren, referring to the chart in this week’s Wells Fargo Investment Institute report (see below).
Changes in raw material prices tend to predict consumer inflation over the next 12 months, according to a report by Wren and Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.
“If broad trends continue, we expect consumer inflation to slow somewhat by mid-year and materially into late 2022,” wrote Wren and Christopher. “For example, lumber, copper and soybean prices are significantly lower than they were at the start of the year and are holding.”
down 2% to $4,266 per pound. That’s below the more than $4.70 price tag seen between October and May for the industrial metal, but still higher than it was in early 2021 when copper was quoted below $4 a pound.
US inflation spiked in October, pushing annual rate up 31-year high was 6.2%, as measured by the consumer price index. Meanwhile, the increase in producer price index in October indicates a high 12-month wholesale inflation rate – but flat – about 8.6%.
While the higher cost of living, as measured by the CPI, is likely to remain on the rise next year, Wren says it may be “in the process of picking up”. Wells Fargo is currently estimating that the inflation rate could slow to around 4% next year, he told MarketWatch.
In another sign that inflation may be easing, “from the supplier side, factories in Asia are reopening and some shipping costs are peaking,” Wren and Christopher written in Wells Fargo’s note.
Frost Investment Advisors also pointed out that shipping costs are falling in a recent report.
“We are seeing some early signs that the trade bottlenecks may be easing a bit,” Frost said in his note on news and market sentiment for the week. November 8, “While the number of vessels moored off the coast of California awaiting discharge remains very high, freight rates appear to be consolidating, both for containers and for trucking.”
While rates remained “fairly high,” Frost said “any improvement is welcome.”
The evolution of inflation is important to investors as it is “one of the most prominent risks facing portfolios today,” according to the Wells Fargo report. “We believe inflation will moderate in 2022, but we expect the path to de-inflation will start with higher inflation in the first half of the year.”
To position the tactic for the next year and a half, see it as “above-average inflation,” Wren said by phone that “we want to look toward a recovery” and into cyclical sectors like industrials. , commodities and finance. As for the energy sector, Wells Fargo recently transitioned to a “even” weight from being overweight, he said, explaining that energy has seen “a pretty big development.”
“So we took some money off the table there,” he said.
Energy Sector of the S&P 500
fell sharply on Wednesday, but is still up more than 50% so far this year, FactSet data shows.
As Wells Fargo notes, the commodity and cyclical equity sectors will “perform better with near-peak growth and inflation.” “The areas that we would like to tactically avoid are those that we expect to underperform amid a strong economy, rising interest rates and low inflation. An important example is long-term fixed income”.
Wren and Christopher also cite their “unfavorable assessment of short-term fixed income as investors assess the Federal Reserve’s eventual response to inflation.”
Although the Fed has maintained that higher inflation will be “transient,” LPL Financial’s asset allocation strategist Barry Gilbert said in a note. Research report This week, the peak may still be ahead amid “supply chain challenges and tightening labor market combined with high demand as the global economy recovers” during the pandemic.
But market participants needn’t wait until the CPI goes back below 3% to feel some relief. “Just knowing that we’re past the peak, something that probably won’t happen until 2022 is enough.”
In addition to supply chain concerns as well as energy and commodity prices, Gilbert said investors should watch for signs that housing costs may be stabilizing.
“Shelter does not include energy costs, which are essentially housing and rent costs, which account for about a third of the CPI and just over 40% of the core CPI (excluding food and energy),” he wrote. quantity). “House costs have skyrocketed over the past three months and housing inflation is a concern – both because it accounts for a high percentage of consumer spending and because it tends to be relatively underwhelming.” .
He suggests that a “continuous monthly reading near 0.3% would be a good sign that housing costs have stabilized,” although at that level costs could continue to climb year on year. in the first few months of 2022. “But if housing costs rise and consumer expectations Gilbert said.
Read: Bullard said
https://www.marketwatch.com/story/inflation-in-process-of-peaking-but-still-poses-threat-to-investor-portfolios-says-wells-fargo-11637187467?rss=1&siteid=rss | According to Wells Fargo, inflation is “in the process of peaking” but still threatens investors’ portfolios.