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Have stocks already discounted a mild recession?

Each month the United States Bureau of Labor Statistics (BLS) releases the Consumer Price Index (CPI). The index is a widely followed key tracking benchmark for the prices of goods and services.


CPI has traded to a 40-year high for most of the year as the Federal Reserve attempts to hike rates to contain rising inflation pressures. CPI data released for July showed the inflation rate slowed for the month.


The Consumer Price Index climbed 8.5 percent year over year through July, compared with 9.1 percent for June. The decline is better than projected. After eliminating food and fuel prices, the inflation index climbed by 5.9 percent through July, about the same as the previous reading.


The price index was flat as fuel prices, airfares, and used car prices declined, offsetting higher rent and food costs. Core inflation slowed for July, climbing by 0.3 percent or lower than economists had expected and better than the June 0.7 percent figure.


Investors welcome the CPI news with another explosive stock market rally, extending the summer rally.


Investors hope that if inflation peaks, the central bank will begin to slow its aggressive monetary stance, lowering the risk that the Fed will trigger a severe recession.


Whether today’s monthly CPI data is conclusive evidence inflation is abating and if the central bank will slow the pace of its interest rate hikes remains debatable.


The stock market appears to be more optimistic. For instance, a brief review of the S&P sectors and sub-industry groups showed a decisive shift in favor of economically sensitive and higher beta S&P sectors even before the release of the CPI numbers today.


The S&P sector performances over the past three months confirm the near-term tilt. Consumer Discretionary (XLY +10.88%), Real Estate (XLRE +8.52%), Technology (XLK +8.34%), Utilities (XLU +7.49%), Industrials (XLI +6.12%), Healthcare (XLV +5.11%), Financials (XLF +3.49%), Communication Services (XLC + 0.88%), Consumer Staples (XLP -0.73%), Energy (XLE -0.80%), and Materials (XLB -1.78%).


A deeper dive into the S&P sub-industry groups also revealed investors returning to aggressive and cyclical-related sectors.


If the above trends sustain, does this imply the stock market may have already priced in a mild or shallow recession?

After all, stock prices peak and trough months and quarters ahead of the business cycle top and bottom.


If the 6/17/22 market low is the market bottom, does this imply that this is another 4-year mid-term election year cycle bottom?


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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