-
According to Fundstrat, investors should take advantage of the inflation-related market sell-off and buy stocks.
-
Fundstrat’s Tom Lee said real progress was made in the March CPI report, suggesting disinflation will continue.
-
Lee also sees a strong chance of a Fed rate cut in June, despite the declining probabilities.
Fundstrat’s Tom Lee says investors should immediately take stock market declines sparked by a hot March CPI report on Wednesday.
Lee said if you delve deep into the inflation report, which was a hair above economists’ expectations, it shows continued progress in disinflation. This suggests to Lee that the stock market decline is another buyable decline, as was the case following the December, January and February CPI reports.
“Would you believe that this was actually a very good CPI report? I think there’s a single chart that would explain it,” Lee said in a video for clients on Wednesday. “Believe it or not, that was actually a very good CPI report. And I think that’s why the stocks that sold off today end up being bought.”
The chart below shows that inflation is gradually returning to its long-term trend of less than 3% across other underlying components of the CPI report.
“The forces of disinflation are really strong because we had the highest percentage of components with inflation below 3% year-on-year. In other words, there are more things growing closer to trend than less,” Lee explained.
Additionally, Lee emphasized that the main driver of inflation in March was higher auto insurance prices, which come several years after a spike in auto prices during the pandemic.
“This higher CPI value was almost entirely due to car insurance. So this just shows that this is a timing issue and not a structural issue. In other words, nothing else causes a higher CPI,” Lee said.
Jeremy Siegel highlighted the same dynamic in an interview with CNBC on Thursday.
“Housing and automobile insurance are the two most lagging of all components of the consumer price index,” Siegel explained. “It has been proven that car insurance premiums follow the increase in used and new car prices 12 to 15 months.”
Lee also said a rate cut by the Federal Reserve in June remains on the table, although futures markets are pricing in that probability at around 20% following the CPI report.
“I don’t think this completely eliminates the possibility of a rate cut in June,” Lee told CNBC on Wednesday, adding that the Fed has three more CPI reports to digest, if any, before its June 12 rate decision one of these CPI reports If there is a return of disinflation, the Fed may be inclined to cut interest rates.
And that, say market professionals, would be good news for share prices.
Read the original article on Business Insider