MW Will inflation stick around? What oil, gold and stocks are signaling about rising prices.
By Isabel Wang
It's 'far too early' to extrapolate from the potential impact of tariffs to 'significantly higher' inflation, says BNY Wealth CIO
Inflation worries have come back to haunt U.S. financial markets as inventors fret over whether potential policy changes in President-elect Donald Trump's second term could stoke a resurgence of rising prices.
Since Trump's victory on Nov. 6, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y has risen around 14 basis points on concerns that some of his proposed policies - including more tax cuts and import tariffs - could lead to an even greater fiscal deficit and a return of inflation, sending interest rates even higher.
However, the stock market breathed a sigh of relief over the past three weeks. The S&P 500 index SPX surged over 3% since Trump's election win, while the Dow Jones Industrial Average DJIA was up nearly 5% and the Nasdaq Composite COMP rallied 3% in the same period, according to FactSet data.
Investors are now trying to discern if Americans' deep-seated frustration over inflation will endure amid a mixed batch of financial-market signals. Here's a look at how individual assets have fared with Trump set to take office in January.
Oil
"Commodities are certainly very sensitive to inflation... especially a significant rise in oil prices could feed through into higher inflation," said Jim Smigiel, chief investment officer at SEI.
Oil futures climbed last week, with the front month U.S. crude benchmark (CL.1) (CL00) (CLF25) up by 6.5% to settle at $71.24 a barrel on the New York Mercantile Exchange.
But Brian Szytel, co-chief investment officer at the Bahnsen Group said the usual correlation between energy prices and inflation may weaken under Trump's pro-energy policies.
"... with the new administration coming in and 'drilling more,' you'd likely have more oil supply [which could weigh on energy prices], so that normal paradigm between oil and inflation would be muted under Trump's presidency," Szytel told MarketWatch via phone on Friday.
See: Trump's 'drill, baby, drill' pledge may be a win-win for drivers and oil producers alike
Gold
Gold has often been considered a hedge against inflation as the precious metal tends to hold its value when inflation surges.
Gold prices (GC00) scored an over 5% weekly gain with the most-active contract (GCZ24) settling at $2,712.20 an ounce on Friday. It was the best week for the yellow metal since March 2023, according to Dow Jones Market Data.
See: Here's what bond and gold traders are signaling about Russia's nuclear shift
To be sure, market analysts attributed the recent surge in oil and gold prices more to rising tensions between Russia and Ukraine, which boosted the market's geopolitical risk premium and stoked demand for haven assets, rather than to inflation concerns.
Geopolitical tensions escalated last week after news reports said that Russia may have fired an intercontinental ballistic missile during an attack on the Ukrainian city of Dnipro. Western officials have since disputed the claim. If true, it would mark the first time Moscow has used such a weapon in the war, according to the Associated Press. Meanwhile, Ukraine on Wednesday was reported to have fired missiles supplied by the U.K. into Russia for the first time.
Value vs. growth stocks
Smigiel at SEI told MarketWatch that value stocks have historically outperformed growth equities during periods of inflation, so they are a good inflation indicator in the stock market.
U.S. large-cap value stocks outperformed growth equities in 2022 when inflation surged to the highest level in more than 40 years. The Russell 1000 Value Index RLV was off 9.5% in 2022, outpacing the nearly 30% slump for the Russell 1000 Growth Index RLG, according to FactSet data.
But in Szytel's view, value stocks now appear more attractive than growth stocks, not due to the potential resurgence of inflation, but because growth stocks have become "overvalued and dominated so much of the stock indexes."
The Russell 1000 Value Index rose 2.4% last week, while its growth counterpart rose 1.7% in the same period, according to FactSet data.
Small vs. large caps
Historically, small-cap stocks have been among the beneficiaries of the so-called reflation trade, as economic growth and inflation rise from a below-average level back to the long-term trend.
However, Smigiel said the outperformance of small caps could be an early inflation warning for the stock market as high economic growth could lead to higher prices.
Small-cap stocks have been on a tear so far in November, boosted by expectations that Trump's proposal to cut taxes and bring supply chains back to the country will eventually boost domestically focused smaller firms. The Russell 2000 index RUT advanced 4.5% last week, compared with the 1.7% gains for both the large-cap S&P 500 and the tech-heavy Nasdaq Composite, according to FactSet data.
Too early to tell what impact tariffs will have on asset prices
Sinead Colton Grant, chief investment officer at BNY Wealth, said it's still "far too early" to extrapolate from the potential impact of tariffs to "significantly higher inflation," and the signals from the financial markets are "not terribly clean from an asset class perspective."
"It would be very surprising to see the next administration adopt policies that would be highly inflationary, in part because all of the indications show one of the big drivers of the election outcome was the concern of the American electorate on cumulative price increases over the last four years," she told MarketWatch in a phone interview on Thursday.
See: Is higher inflation here to stay? Fed faces hurdles in quest to crush rising prices.
In the meantime Wall Street sees this Wednesday's personal-consumption-expenditures price index as the next significant event for the markets in the holiday-truncated Thanksgiving week. While investors will not see the potential impact of Trump's policy changes in this week's inflation report, a hotter-than-expected reading could dampen the market sentiment and throw a wrench into the stock market's year-end rally.
Retailers are on the earnings docket before markets close on Thursday for the U.S. holiday and shut early on Friday. Best Buy Co. Inc. $(BBY)$, Dick's Sporting Goods Inc. $(DKS)$, Macy's $(M)$ and Nordstrom $(JWN)$ are expected to announce results on Tuesday. Tech giants CrowdStrike Holdings Inc. $(CRWD)$, Dell Technologies Inc. $(DELL)$, and HP Inc. $(HPQ)$ will report this week as well.
-Isabel Wang
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(END) Dow Jones Newswires
November 24, 2024 12:01 ET (17:01 GMT)
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