Why The CPI Inflation Number Was Not 'A Bearish Gamechanger' For Stocks

The SPDR S&P 500 ETF Trust SPY took a big hit this week after the U.S. Labor Department reported a 4.2% rise in CPI for the month of April, the highest inflation reading since 2008.

The big inflation number spooked investors who are concerned the $6 trillion in COVID-19 stimulus could trigger hyperinflation, but Sevens Report Research’s Tom Essaye said Thursday the headline inflation number may not be as bad as it appears at first glance.

Digging Deeper: Essaye pointed out that a deeper dig into the April inflation number reveals airfare, used vehicles and lodging prices were all up 10% from a year ago. Essaye said those three markets endured massive, unsustainable jumps in prices related to specific catalysts: airfare and lodging prices jumped because of economic reopenings and used vehicle prices jumped because of semiconductor supply issues.

Related Link: 'I'm Playing A Bit Of Defense': Experts React To 4.2% CPI Inflation

Once you remove those three specific markets from the calculation, Essaye said CPI was up just 0.4% month-over-month, less than half the 0.9% increase that was reported. He said those adjusted numbers suggest the CPI report was far from “a bearish gamechanger” for stocks.

“Despite the market reaction Wednesday, nothing in this report materially changes the outlook on inflation, nor does it imply the Fed is ‘wrong’ about its contention that surging inflation is temporary,” Essaye said.

How To Play It: For now, at least, Essaye said stocks are under pressure for two reasons. First, the CPI number reinforced investor fears that inflation could be a real risk to accommodative monetary policy. Second, inflation concerns have triggered a rotation out of tech stocks, which are heavily weighted in the S&P 500 and other equity indices.

For stocks to resume their rally, Essaye said investors would be watching for signs that inflation fears and tech selling pressures have eased.

In the meantime, he is recommending investors buy value stocks and cyclical stocks, which he believes will outperform in the current environment.

Benzinga’s Take: Investors who want to follow Essaye’s recommendations can consider going long with ETFs such as the Vanguard Value Index Fund ETF VTV and Consumer Discretionary Select Sector SPDR Fund XLY. In addition, investors should pay close attention to the CPI number for the month of May, which is due in early June.

(Photo by Alexander Mils on Unsplash)

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