It’s coming. Inflation that is. Many unsuspecting investors and bureaucrats at the Fed don’t see it yet. But it’s coming.
We expect inflation to peak in the ensuing months, sometime in the first quarter of 2017. Commodity prices are rising once again, and that could push the Consumer Price Index (CPI) up to 3%, maybe even 4%.
That’s what our proprietary inflation indicator suggests.
The market is already pricing this in. Copper prices, a common barometer of global growth and inflation, are up +20% in the past three months. The Basic Materials sector (XLB) is up +12% over that period versus 7% for the S&P 500. This sector is also High Beta which basically means companies within the sector are most tethered to a rising or falling stock market (versus Low Beta stock movements that are less correlated to the market).
WHAT TO BUY
Instead of buying the pop in Basic Materials or Copper, we’ve got a few other ideas that are tied to inflation and U.S. economic growth accelerating. “I still like long Financials (XLF +2.2% last week) and Tech (XLK +1.9% last week) vs. Low Beta Shorts like Utilities (XLU -0.4% last week in an up tape),” writes Hedgeye CEO Keith McCullough.