Author: Chris Hood
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Despite Jerome Powell’s remarks last week on the positive outlook for the US economy in 2022, one concern looms in the background.
How high is it really, and where is it going?
Some are worried that the government’s CPI numbers are misleading. For example, could the data used to calculate these numbers be concealing a higher inflation rate than is being reported?
And there’s concern among institutional money that the excessive quantitative easing could lead to levels of inflation not seen since the 1970s.
Sentiment in the market certainly reflects this growing concern.
As a trader, I don’t like to make macroeconomic predictions. However, when they affect the price action of the tickers I trade, I can’t afford to ignore them.
And neither can you.
I want to first caution you that you should always trade the charts in front of you, not some grand theory about what might happen.
There’s little reason to worry about investor concerns unless they’re reflected in price action. But it’s helpful to know how increased inflation, or investors’ perception of potential increases, could affect various sectors and businesses.
It provides some helpful context on what we might expect as we move into 2022.
Which sectors are likely to suffer from inflationary pressure and which have historically done well?
First, let’s look at what types of businesses could get hammered in this environment and which ones may benefit.
Inflation is, in a nutshell, an increase in the cost of goods and services that decreases the purchasing power of a currency. So, basically, almost everything will get more expensive.
Unless you’re a billionaire, you’ve likely noticed the increase in prices in everything from electronics to groceries in the past several months. Think about how expensive your last steak dinner was or the average cost of your morning cup of coffee.
When inflation hits, it costs businesses more to make the things people want to buy.
They aren’t just going to suffer a loss here; those costs get passed along to the consumer. As a result, the average person will curb spending and live a bit more frugally.
In other words, if it isn’t a necessity, people will be less likely to buy it.
So all those high-priced electronic gadgets, home furnishings, books, and non-essential items peddled by AMZN probably won’t get as much love.
In market terms, we could say that the consumer discretionary sector (XLY) could be decidedly bearish in the near to medium term. So, I wouldn’t fish those waters for bullish trades.
On the other hand, there are those things we just can’t do without – things like water and electricity.
If the water bill is a bit more expensive, people aren’t going to stop using it. I can’t think of anyone who’ll decide to stop showering, cooking meals, and washing dishes just because the utility bill creeps up a bit.
They’ll choose to keep running water and just pay whatever it costs.
Businesses based on necessities, like AWK, won’t lose much revenue if inflation rises. And investors know this.
In the coming weeks and months, sectors like utilities (XLU) could provide some great sustained upward momentum.
So keep your eye on them.
The theses here are based on historical trends and the assumption of higher inflation. Always keep in mind that they are tendencies and not trading set-ups.
You have to dig into the charts and follow your plan.
I highly recommend you watch this week’s free episode of Under The Hood, where I discuss this in much more detail. It’s an hour’s worth of intense analysis of where to look for opportunities driven by both inflation and the Fed’s proposed interest rate hikes.
No matter what happens, you can always make money in the market.
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