The market’s bullish reaction to consumer price index data may disturb skeptical investors the most. In February, the CPI indicated prices rising by 0.4% month-over-month. Prices increased by 3.2% compared to last year. The report is consistent with January’s 0.3% monthly and 3.1% annual increase.
Markets are nearly completely convinced that the Fed will cut interest rates this June at the latest. This is an illogical assumption, albeit based on Fed Chair Powell suggesting an eventual cut. Still, the Fed Chair looks at data every month. Should CPI increase in the next three months between April and June, it might panic and increase rates by 25 basis points.
Fortunately, the odds are low for a rate hike. Rate levels, or monetary policy, are separate from fiscal policy.
Since this is Biden’s election year, the President is pitching a $7.3 trillion election-year budget. Higher spending stimulates the economy, increasing inflation. If investors assume higher spending in military and defense, Lockheed Martin (LMT), L3 Harris (LHX), RTX (RTX), and Northrop Grumman (NOC) are attractive holdings. They trade at a premium to fair value because markets anticipate they will win government military contracts worth up to billions of dollars.
To hedge against inflation, investors bought Bitcoin (BTC-USD) more aggressively than gold. BTC and Ethereum are the most attractive assets compared to gold. Retail investors may hold them through ETFs or on cryptocurrency exchanges, like that run by Coinbase (COIN).
