Benign Inflation Data to Bolster Market Rally: 5 Top Picks

On Mar 12, the Department of Labor released Consumer Price Index (“CPI”) data for the month of February. Although inflation rose for the first time in four months, the data was in line with the consensus estimate and in fact saw a decline from the previous month on a year-over-year basis. Notably, core CPI, a key inflation metric, came in below expectation.

Market watchers are of the view that tamed inflation will allow the Fed to continue with its dovish monetary stance. All these positives will strengthen investors’ confidence in risky assets like equities. Consequently, it will be prudent to invest in stocks with strong growth potential and a favorable Zacks Rank.

Impressive CPI Data for February

The CPI for February came in at 0.2%, in line with the consensus estimate. Year over year, the cost of living index has declined to 1.5% in February compared with 1.6% in January. February’s yearly CPI gain is the smallest since September 2016.

However, core CPI –- the key inflation metric, which excludes erratic price changes of food and energy –- rose 0.1% in February, below the consensus estimate of 0.2%. Year over year, core CPI declined to 2.1% compared with 2.2% in January.

February’s CPI data was tamed despite a tight labor market.  Hourly wage rate grew 0.4% in February compared with the consensus estimate of 0.3%. Inflation adjusted hourly wage grew 0.3%. The unemployment rate also declined to the historic low level of 3.8% from 4% in January.  

Fed Likely to Maintain Dovish Stance

The benchmark inflation rate that the Federal Reserve follows is 2%. For as long as, inflation remains below 2%, the central bank will be unlikely to take an aggressive stance for rate hike. The last available core personal consumption expenditure (PCE) index –- the Fed’s most-favored inflation gauge –- was also 1.9% in December while February CPI stood at 1.5%.

On Jan 30, Fed chair Jerome Powell said that the central bank will maintain its dovish monetary stance at least for the time being. Notably, the Fed’s aggressive monetary stance in 2018 was largely held responsible by industry watchers for the stock market mayhem in the fourth quarter. On Feb 27, in his testimony before the House Committee, Powell said that the central bank will not downsize its $4 trillion balance sheet this year.

Decline in Government Bond Yields and Dollar Index

Following the release of February CPI data, yields on U.S. government bonds have declined. The yield on benchmark 10-year Treasury Note dropped to 2.639% from 2.641% on Mar 11. Likewise, yields on long-term 30-Year US Treasury Note decreased to 3.031% from 3.032%. Yields on short-term 2-Year Treasury Note slipped to 2.471% from 2.477%. Record-high government bond yields were largely blamed for the fourth quarter’s stock market turmoil.

Lower than inflation data also had an impact on the dollar index. On Mar 12, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, decreased 0.3% to 96.913. On Mar 7, the DXY touched its three-month high at 97.70. Lower dollar price will make U.S. exports more competitive in the international markets.

Our Top Picks

The U.S. economy is likely to maintain its long-term growth albite at a slow pace. At this stage, investment in stocks with strong growth potential will be lucrative. Our selection is backed by a Growth Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.