Investors want to be on their guard as the stock market continues to rally.
“The market has reverted back to gold,” said Sameer Samana, a senior global market strategist at the Wells Fargo Investment Institute, to think, “okay, mission accomplished, inflation is in the bag, the Fed may back down” in a phone interview on Wednesday. “We think it’s too soon.”
Samana warned that inflation remains elevated despite the softening in July. He added that core inflation, which robs food and energy, is likely to remain “stubbornly” high as stickiness in areas like wage growth and housing costs is likely to remain a “problem” for the Federal Reserve.
U.S. stocks rose on Wednesday as the tech-heavy Nasdaq Composite entered the bull market, according to market data from Dow Jones.
Investors should remain on the defensive, according to Samana, who said Wells Fargo loves healthcare and is weighing heavily on the sector, having recently upgraded consumer staples and utilities to neutral. He expects the recession to start in the second half of this year, although “we don’t think stock markets are reflecting that.”
Reading: ARK’s Kathy Wood: America is already in recession, could exit in 2023
Samana said Wells Fargo Investment Institute also loves energy and technology.
“We prefer technology because we focus on the enterprise customer’s business,” as opposed to consumers, whose discretionary spending may be lacking, he said. Samana said that “businesses are likely to emerge from this next recession in slightly better shape than consumers, who will have a much harder time with higher borrowing costs and higher inflation.”
The US Bureau of Labor Statistics reported Wednesday that US inflation, as measured by the CPI, was flat in July after rising 1.3% in June, an annual rate of 8.5%. Inflation has slowed over the past 12 months from 9.1% in June.
Reading: US consumer price inflation set to unexpectedly fall in July
July inflation was lower than expected, George Catrambon, head of DWS Group’s Americas business, said in a phone interview on Wednesday. “The core was better than feared.”
Core CPI, which excludes food and energy, rose 0.3% in July, slowed by a 0.7% rise in inflation in June. Economists polled by the Wall Street Journal estimated that CPI rose 0.2% in July and core inflation rose 0.5%.
“Based on some of the data we’ve seen, there has to be some optimism,” Caterbon said. “But if the market continues to rise, valuations will rise again.”
In his view, “the market is overtaking” as the S&P 500 now trades at an expected price-to-earnings ratio of about 17.5, even as the Fed remains on target for inflation at 2%. At the same time, “global adversity persists,” he said, citing concerns about geopolitical tensions between the US and China over the Russo-Ukrainian war and Taiwan.
Catrambon said he’s concerned the “market is ignoring” how far the Fed has gone to bring down inflation by raising its benchmark interest rate.
Reading: Fed’s Evans says July CPI data is ‘positive’ but ‘no one could be happier’ with annual inflation rate at 8.5%
US stocks ended higher on Wednesday with gains on the Nasdaq Composite. The S&P 500 SPX closed up +2.13%, down 2.1% to 4,210.24, according to FactSet data, while the Dow Jones Industrial Average DJIA was up +1.63%, down 1.6%, and the tech-led Nasdaq Comp was up +1 2.89% to 2.9%.
Investors should focus on “profitable technology, quality in the technology sector,” suggested Caterbon.
Steve Chiavrone, head of multiset solutions at Federated Hermes, said he was underweight technology “for most of the year” and “neutral” on equities versus bonds.
“Tech is trading on rate expectations, with the Fed raising rates earlier this year to deal with rising inflation that hurt growth stocks like tech. Now the market is a potential fulcrum for the Fed,” Chiavron said by phone on Wednesday. Where the central bank stops wandering when peak inflation eases in a possible recession and then cuts interest rates.
“I think this half is so cute,” Chiavarone said. “I think it’s going to take longer to play all of that.”
While Wednesday’s stock market rally showed some “recovery” after better-than-expected July inflation readings, “I don’t think there’s a turnaround,” he said. “Energy prices have come down, which is good,” he said, but core inflation has remained flat at 5.9% over the past 12 months.
“Financial conditions are weak now” before the Fed hike in July, although the Fed intends to tighten monetary policy to moderate inflation, Chiavron said.
See also: Stock market investors praised the July inflation data. Well-known companies like Pimco and BlackRock are not so sure.