A Fuzzy Target

The data above rely on inflation cycles going back to 1940. The problem with our current inflation is it stems from a once-in-century pandemic, so history may not apply. Here's my colleague Lisa Beilfuss on today's Target news: 

It was always a matter of time before inventory shortages flipped to inventory gluts, with companies’ pricing power tested as consumers pay more for food, gas and shelter, spend down excess savings, and resume normal activities more than two years into the Covid-19 pandemic. What is going on at Target fits two dominant conventional narratives: Inflation is peaking and consumers are shifting—not curtailing—spending. But it may not be that simple.

The problem, according to Lisa, is that retail prices alone might not be enough to move the inflation needle: 

While Target’s price cuts and broadly rising inventories suggest consumers can expect to see discounts across retailers, services make up about 60% of the CPI. The point is that while goods prices are probably peaking, they are doing so as stickier service prices rise. That is not to mention that on the goods side, upside risks to food and energy remain as the war in Ukraine threatens the coming crop season and limits energy supply. 

You can read the rest of Lisa's story here.

The other issue, she notes, is that corporate executives are increasingly downbeat about growth. CEOs seem to be preparing for a recession. 

Recessions are something to fear, largely because of the economic pain and job losses that they bring. For stocks, though, the pace of inflation may actually be more predictive -- at least in the near-term. According to Paulsen at Leuthold, stocks have risen following inflationary peaks, regardless of growth. When a recession is involved (which occurred in  about half of the inflationary cycles since 1942) stocks still rose 8.8% in the 12 months after inflation's peak. 

Paulsen concludes: "A backdrop of uncertainty and fear surrounding inflation, Fed tightening, rising bond yields, and recession fears -- combined with a recently revalued stock market -- usually proves to be a great entry point for stock investors."