Further interest rate hikes remain on the table for the Federal Reserve. But that’s not worth it in the stock market, says John Stoltzfus, Oppenheimer’s chief investment strategist.
“We continue to advise investors to put their enthusiasm on long-term pause or focus and instead lower their expectations,” Stoltzfus said in a note to clients on Monday.
Stoltzfus stopped short of dropping the S&P 500 below its year-end target of 4,900, but noted that inflation is still far from the Fed’s 2% target. Wednesday morning’s reading for the latest consumer price index is expected to show a 3.6 percent increase in August from a year earlier, up from a 3.2 percent increase in July.
On a “core” basis, which excludes the volatile food and energy categories, CPI is expected to have grown by 4.3% in August last year, a slowdown from the 4.7% growth seen in July.
“In our view, the stickiness in food, services, energy and other prices warrants the Fed to be on the lookout for one more hike this year and possibly another next year,” Stoltzfus wrote.
As of Monday morning, markets pegged at a 93% chance the Fed will keep interest rates on hold at its September 19-20 conclusion. According to CME Group data. Looking ahead, markets are pricing in a 50% probability that rates will remain unchanged at the end of 2023.
Wednesday’s CPI report will be the last inflation data for the Federal Reserve ahead of next week’s meeting.
“We expect the committee’s post-meeting statement to be biased as inflation continues to pick up, the labor market continues to cool, and GDP continues to rise,” Wells Fargo chief economist Jay Bryson said. Note to customers on Monday. “Specifically, the statement is likely to focus on ‘further policy consolidation’ rather than suggesting a longer pause to hold elections at the next meeting on November 1.”
One of the key categories that drives inflation is energy prices. West Texas Intermediate ( CL=F ) and Brent crude futures ( BZ=F ) have rallied more than 25% since late June, sending gasoline prices soaring and threatening further price pressures for industries most vulnerable to oil costs.
This, however, could provide a buying opportunity in the stock market at Stoltzfuss and the Oppenheimer group. Up to this point, the oil boom has not been reflected in the exchange rate of the energy sector.
“We find the S&P 500 energy sector more attractive at a time when policymakers in the U.S. and abroad are trying to control inflation and manage economic growth,” Stoltzfus said.
Oppenheimer also It looks at energy efficiency as government infrastructure projects and chip manufacturing efforts help boost the sector.
Josh Shafer is a Yahoo Finance reporter.
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