VIDEO: CPI Spikes, Stocks Rise…Go Figure!
Welcome to my video presentation for Friday, June 11. For a deeper dive on these themes, read my article below.
If you’re worried about inflation, you have every right to be. Whenever it breaks free of its cage, the inflation beast chomps away at your purchasing power and wealth.
But it’s the level of worry that matters. Some investors are panicking about inflation, but that’s unwarranted.
My advice about the latest inflation data can be summarized in four words: relax and buy stocks.
Successful investors rely on data, not emotions. They create a long-term investment strategy and stick with it, calibrating as necessary but never simply dumping their stocks because of a daily headline.
First, let’s look at the latest inflation report and put it into perspective. Further below, I’ll also show you how inflation has created a new investment opportunity.
The government reported Thursday that the U.S. consumer price index (CPI) jumped 5% on a year-over-year basis in May 2021, the fastest pace since August 2008. The 3.8% jump in the core inflation rate (which excludes volatile food and energy prices), was the sharpest increase in nearly three decades (see chart).
The consensus estimate had called for the CPI in May to increase year-over-year by 4.7%.
From prices of food to lumber to gasoline, Americans have been seeing higher prices in stores and now their anecdotal pain has been confirmed by the empirical data. The return of inflation, after a decades-long absence, is spooking consumers.
But counterintuitively, investors weren’t alarmed by the numbers. In the wake of the CPI report Thursday, the Dow Jones Industrial Average rose 19.10 points (+0.06%), the S&P 500 climbed 19.63 (+0.47%), and the tech-heavy NASDAQ jumped 108.58 points (0.78%). The S&P 500 closed at a new record high. The 10-year Treasury yield, which often rises in tandem with inflation, actually fell to 1.45%.
U.S. and European stocks were trading higher on Friday, as investors at home and overseas took comfort from the pledge of steady monetary stimulus from central bankers.
The Federal Reserve and European Central Bank are both dismissive of inflation fears. They insist that the inflationary spike will abate as the year wears on, when pandemic anomalies such as supply chain disruptions settle down.
The analyst consensus for inflation in 2021 in the U.S. is still only 2.26%. Wall Street doesn’t expect the Fed to react to Thursday’s CPI reading by hiking rates, which accounts for the concomitant rise in equities.
With new records being set by the S&P 500 over the last few months, it stands to reason that some investors have not needed much convincing to stay all in and continue buying. This mindset has prevailed, even amid rising inflation.
Behind the inflation numbers, ostensibly troubling data are actually signs of returning economic health. Notably, the resurgence of the energy patch after its collapse in 2020 bodes well for the economy and stock market. As you can see from the following chart, crude has been on the ascendancy year to date:
Keep in mind, the CPI numbers are year-to-year comparisons and oil has a long way to climb back, so it’s logical that prices lately have been sharply higher compared to 2020 because of the economic collapse wrought by the pandemic last year.
Cashing in on health care…
One sector where inflation is readily apparent is health care. As anyone knows, the cost of visiting the doctor or getting treated in the hospital can be astronomical.
Price growth for medical goods and services is projected to accelerate, averaging 2.4% annually until 2028, partly reflecting faster expected growth in health sector wages.
Several trends are fueling the rise in health care costs in the U.S., including an aging and growing population; increases in health care utilization; and increases in the price and intensity of services.
Health care inflation is a key factor behind the rise of an exciting new technology breakthrough: telemedicine.
During the pandemic, quarantined consumers got accustomed to telemedicine, more than ever before, because of lockdowns and social distancing. As COVID restrictions ease, this development will intensify. Remote medical treatment enhances accessibility while dampening costs.
The health services sector is a cash-generating machine that cranks out robust shareholder returns, year in and year out. Add a graying population and expanded government insurance to the equation and selective health stocks make solid bets. Meanwhile, specialized software firms in the medical technology space enjoy high margins and competitive “moats.”
After months of painstaking research, we’ve unearthed the best plays on telemedicine, but many investors have never heard of them. The time to invest in these little-known companies is now, before the herd catches on and bids up their shares. For details, click here.