PPI vs CPI – Why it matters!

By David Nelson, CFA

In the face of rising investor concern on a range of issues stocks put in a strong week adding to month to date gains. The pivotal moment came Thursday with the S&P delivering its strongest day in months up +1.7%. Add Friday’s monster earnings beat from Goldman (GS) and the glass morphed from half empty to half full. Like a platoon reclaiming the high ground stocks ended the week above the 50 moving average putting in a higher high and even more important a higher low. There’s still a lot of damage especially on the NASDAQ where the percentage of stocks above their 200-day moving average sit just under 37%.

Despite the feel-good week stock investors are looking for more clarity surrounding growth in an inflationary backdrop. The potential for stagflation has been the topic of conversation on trade desks and in part what all but wiped out third quarter gains.

Percentage of Nasdaq stocks above 200 day moving average

With prices rising in energy, rents, groceries, and everything in between an even bigger concern for industry was the fact that the PPI (Producer Price Index) has been rising faster than the CPI (Consumer Price Index.) Why is that important? If producer prices are rising faster than those for the consumer it’s a signal that many industries are having trouble passing on increased costs. Eventually that has to lead to lower margins or if they try to raise prices, less consumer demand.

PPI vs CPI

At least for a moment those fears seemed to subside with Thursday’s big performance. Last week the PPI came in just a touch light and the unemployment claims were a little less than expected. While just two data points it pointed to less inflation and more employment, the opposite of stagflation.

Only a handful of companies have reported but during the next 2 weeks 63% of the S&P 500 by market cap will release earnings. It’s reasonable to assume that two weeks from now most of the performance good or bad will rest on the outlook CEOs provide and any insight they can give us on supply chain improvement and pricing. What does the hiring picture look like? Is supply chain disruption forcing you to rethink product cycles? And most important will there be a Christmas?

*At the time of this article some funds managed by David were long GS