High intergenerational inflation It was the story of 2022. This will not be the story of 2023. The bogeyman of negating inflation — and even some deflation — is about to become the biggest risk to stocks, and investors will have to figure out how to position portfolios for falling prices.
US consumer prices It rose 6.5% year-on-year in December, for the sixth straight month. The pace of pricing gains slowed. Investors were happy. the
It gained 2.7% for the week. the
Gain 672 points, or 2%. the
was the biggest gainer, closing in at 4.8%.
Inflation, while slowing, is still there, although it may not last much longer. Signs of an imminent drop in prices are emerging. Take apartments, which nearly 40 million Americans call home, for example. They’ve felt the pain of inflation in 2022, with average rents rising about 7% year over year, according to the Bureau of Labor Statistics. But those high prices are starting to taper off, and now it seems no one is looking to move.
The real estate service provider RealPage notes that demand has “completely evaporated” by the end of 2022. “Volume always precedes price,” says one real estate investor, and he’s right. Rents have to come down to get people to consider moving again.
Car prices are also very high. The average new car price in the United States hit a record $49,507 in December, according to the data provider. Cox Motors. These prices are starting to hit demand, too, and are forcing companies to reconsider.
(Stock ticker: TSLA), for the one, Reducing the prices of some of its vehicles Up as much as 20% in the past week as inventory built up and order prices fell.
Everywhere we look, the price of goods is dropping. Solid? Aluminium? copper? oil? corn? They’re all down 30%, on average, from the highs they reached last year.
The only thing that does not come down is wagesthanks to a job market that still looks strong, with Job opportunities in the United States Fixed between 10 million and 11 million. The combination of lower product prices and a strong labor market is not good news for investors, because companies will have to pay workers more but get less for what they sell. Profit margins “will shrink,” says Brian Rauscher, head of global portfolio strategy at Fundstrat. “This is a given.”
Savita Subramanian, head of equity and quantitative strategy at Bank of America Securities, predicts the same. She wrote that the S&P 500’s 2023 earnings estimate is very high, at about 15% “amid uncertainty in demand and a tougher pricing environment.”
It looks for areas of the economy that can produce “more margin” and says healthcare stocks are a good place to look. Bank of America analysts favor stocks such as:
Uncertainty in demand is also starting to emerge. Rauscher notes that new orders — a leading indicator of demand — are declining. The Institute for Supply Management’s index of new manufacturing orders has remained in negative territory for six of the past seven months. Its index of new service orders slipped into negative territory in December for the first time since spring 2020.
“There will be an issue of pricing power as we move forward…[so favor] Companies with the most stable margins,” Rauscher says. He wants those that can still raise prices, or cut costs effectively, or both.
That could mean trouble for the stock market in general, despite a strong start to the year. He recommends having high-quality companies with better budgets and strong management teams.
This is a solid strategy for any market – and it’s especially wise when prices start to drop.
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