What Direction is the S&P 500 Taking Following the June CPI Report?

June CPI rises by 0.2% and 3.0% over the last year, with shelter accounting for 70% of the increase; food prices also increase.

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The recent June 2023 consumer price index (CPI) report has sparked different reactions among investors. Those heavily invested in equities are pleased with the cooling inflation, while those holding trillions of dollars in money market funds fear missing out on further gains. Bearish investors, on the other hand, are waiting for the markets to turn and are skeptical of the slowing inflation.

So, who is right? In the short term, stock markets can be likened to a voting machine, where traders analyze every data point from the CPI report. However, in the long run, markets function more like weighing machines, taking into account multiple data points. Therefore, it's important to view the CPI report as just one piece of the puzzle.

In June, the consumer price index rose by 0.2% and by 3.0% over the past 12 months. Notably, shelter expenses accounted for 70% of the increase, making it an area of interest for readers. Food prices, both at home and away from home, also saw increases. Food at home remained unchanged in the month, while food away from home increased by 0.4% in June and 7.7% over the past year.

While this information may be interesting, it's important to note that it may not directly translate into actionable investment opportunities. However, readers can keep an eye on food stocks and observe trends in the market. For example, Chipotle Mexican Grill (CMG), McDonald's (MCD), and Starbucks (SBUX) are mentioned as examples, but further analysis is needed before making investment decisions.

The CPI report did not benefit from falling energy prices compared to the previous month's report. The energy index gained 0.6% in June, indicating a potential upward trend. OPEC+ has aggressively cut output, and it is expected that crude oil prices will strengthen in the coming months. This could impact future CPI levels and potentially lead to the Federal Reserve raising interest rates.

Traders may argue that rate tightening will have little to no impact on the stock market, especially after a 1.0% rally. Additionally, the rebalancing of the Nasdaq 100, which includes dominant stocks like Amazon, Apple, Netflix, and Microsoft, is not expected to significantly affect the stocks or the index. These companies have proven their worth and continue to innovate and grow.

Despite the potential for energy inflation due to supply cuts, it is unlikely to reverse the bullish sentiment in the markets. The energy index has fallen by 16.7% in the past year, and it would take a significant increase in WTI crude prices to cause concern among investors.

It's important for investors to compare the June CPI to last year's inflation increase of 1.2%. This perspective can provide valuable insights into market confidence and potential risks. Companies like CVS Health, Advance Auto Parts, Walgreens, and Dollar General are facing challenges such as shrinkage and weaker demand. On the other hand, retailers like Costco, Walmart, and Amazon are expected to navigate lower sales without major issues.

With inflation at 3.0%, above the target rate of 2.0%, it is likely that the Federal Reserve will raise interest rates at its next policy meeting. While this may be necessary to control inflation, it introduces risks to the credit market. Weak commercial real estate markets could impact regional and big banks, and JPMorgan Chase's upcoming results may provide insights into this sector.

In the automotive sector, tighter credit requirements are affecting used car and truck demand and prices. This could potentially lead to an increase in auto repossession rates.

Currently, the S&P 500 is trading at nearly double the relative volume, indicating a potential climb towards 4,500. Investors who are fully invested may have few reasons to take profits, while neutral investors collecting interest income may not feel compelled to chase the index rally. Bearish investors, who are experiencing the most pain, may be waiting for the next credit crisis to unfold. The Federal Reserve's higher interest rates could potentially lower CPI, but this also adds risks to sectors dependent on lending and leverage.

In conclusion, the June CPI report has sparked different reactions among investors. It's important to consider multiple factors and data points when making investment decisions. While certain sectors may be impacted by inflation and interest rate changes, others may be able to navigate these challenges successfully. Stay informed and consider all aspects of the market to make the best decisions for your investments.

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