Investors should keep cautious when entering the stock market again, as the sentiment might still be bearish, DataTrek said Thursday.
After the overall Consumer Price Index cooled, a robust stock market rally was sparked on Wednesday, key details raised red flags for the research firm. For instance, food inflation soared to another record of 10.9% in July, the highest rate since the early 1980s. Meanwhile, shelter inflation reached 5.8% last month, the highest since 1990.
The Federal Reserve is known for following the “Rule of Threes”. In other words, central bankers prefer to see three consecutive readings of sequentially lower inflation before they believe it’s declining.
“Happy as we are that stocks read the CPI report as proof that inflation is heading in the right direction, we wonder if the current rally off the June 16th lows is perhaps a bit too euphoric,” DataTrek cofounder Nicholas Colas said in a note.
Colas pointed out to the S&P 500’s mid-June low of 3666. Since that date, it has surged 15%. On the other hand, investors have also been selling mutual funds and bonds, which, if continued, would signal the market thinks the worst of inflation is already over, he added.