Reversal of Fortune? Dr. Copper pointing to lower inflation ahead. – C.J. Lawrence – Market Commentary – June 25, 2022

This post was originally written on June 25, 2022, 2:39 PM EST.

The S&P500 was up 6.5% last week. On the sector level, energy was down 2%, and consumer stocks were up 8%, a reversal of fortune to the year-to-date pattern. For the year, energy stocks are the best sector, up 29%, and consumer stocks down 28%, are the worst. The market is down 18% as of this writing. Could this be a sign of better markets to come? Hard to tell but the market sure acted like there is a break in inflation.

Copper is a good indicator of inflation and is commonly referred to as “Dr. Copper” given its predictive value when it comes to inflation.  Copper prices have taken a sharp leg down last week, see chart. Notice how Copper broke out at the precise moment the pandemic hit in March of 2020, an indication of the difficult supply to come. We are seeing the same in wheat prices which have come down significantly from the recent high but are still in an uptrend.

Industrial materials like Aluminum have also now broken the uptrend and falling sharply.  This all indicates that inflationary pressures from the economy may be moderating. This will be welcome news for the Fed given its aggressive inflation-fighting policy of lifting rates is “data dependent”. The three largest components of inflation as measured by the Consumer price index (CPI) are housing at 41%, transportation at 16.8%, and Food & beverages at 15.3%.

Until these three components of CPI come down, the Fed will continue to raise rates.  Given last week’s price action, the market may be beginning to anticipate a path towards lower inflation. Using our trusted “Rule of 20”, if inflation moderates by year-end to for example 4%, then the current price/earnings ratio of 17x for the S&P500 is starting to look more reasonable.

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.