- According to Tom Lee from Fundstrat, when the July CPI report is released on Thursday, it could lead to a notable increase in the stock market.
- The expected core CPI is 0.22%, but Fundstrat believes the actual CPI will be lower at 0.15%.
- Lee mentioned that the main reason for this is the decrease in used car prices, which is affecting the overall CPI.
According to Fundstrat’s Tom Lee, after the July CPI report comes out on Thursday, investors might see a strong increase in the stock market. The expected Core CPI is 0.22%, but Fundstrat’s experts believe inflation will be lower at 0.15%, which is an annualized rate of 1.8%. This is slightly below the Federal Reserve’s goal of 2% inflation over the long term.
Lee’s positive prediction is important because he had recently cautioned investors about a possible short-term stock market drop due to seasonal trends in August and a technical signal indicating selling. Following his warning, the S&P 500 index fell around 2.5%.
However, the July CPI report could be the event that boosts stock prices again. It might confirm the idea that the Federal Reserve is done raising interest rates, which could lead to a recovery in the stock market.
“We think that an increase of +0.15% would be a pleasant surprise compared to what most people expect… The main reason for this is the decrease in CPI caused by the drop in used car prices,” Lee explained. “In our opinion, this good surprise would outweigh the sudden negative events that shook the markets on Tuesday.”
The events Lee mentioned as “sudden negative events” involve Moody’s lowering the ratings of several local banks due to the possibility of an economic downturn. Additionally, concerning economic data from China revealed a return of deflation, which also impacted the markets negatively.
Lee is confident that if the July CPI report shows lower inflation than anticipated, it would be enough to cause a stock market rally that recovers all the losses experienced since the beginning of the month. This type of rally could mean a rise of at least 2% in the S&P 500 index.
Part of Lee’s confidence in a milder CPI report comes from the fact that from the end of 2019, the rising prices of cars and housing were responsible for 66% of the overall inflation increase. However, these price increases in vehicles and housing are now slowing down significantly.
“Many investors don’t fully realize how much used cars and housing influence inflation. As these parts slow down in their price increases, the other parts of the economy won’t necessarily cause a big rise in overall core inflation,” Lee explained.
Another factor that could contribute to a potential stock market rally after the July CPI report is the change in how investors feel about the market due to the past week of stock market decline.
“It seems like investors have become more cautious lately, which is actually a good thing for how people feel about investing. Stocks also appear to have been sold off too much. So, we believe there’s a very high chance that stocks will have a strong rebound after the CPI report,” Lee said.