Fearing Sticky Inflation? Play Cyclical Sector ETFs

While we have been grappling with high inflation for more than a year, we should note that the U.S. inflation has already peaked and has been on a downtrend now. Year-over-year CPI peaked at 9.1% in June last year, and since then monthly readings have steadily declined.

The most recent CPI report, for April 2023, showed prices up 4.9% over the prior 12 months, the lowest since April 2021, and below market forecasts of 5%. While rising inflation data spark rising rate concerns and a falling stock market, history suggests that inflation has not been a problem for equities.

Goldman analysts said last year that history indicates the market reacts positively when inflation shows signs of peaking,as quoted on a CNBC article. The market usually falls in the run up to the peak in headline inflation. But after the peaks, there is a little more variance and on average the market does recover, the CNBC article went on to highlight a year ago.

In the previous 13 inflation rally since 1951, the market was higher 12 months later nine times. The biggest gain was a 33.2% increase from the March 1980 top, per that article. Even if there are steady rate hikes, we see no need to fear rising rate risks. The last full cycle of rate increases happened in the United States between June 2004 and June 2006 as rates progressively rose from 1.00% to 5.25%.