Will Hopes for Peak Inflation Keep Driving the Market Higher?

The S&P 500 continued its rally in November, gaining 5.6% to cut its year-to-date loss to 13%. Stocks jolted higher after the latest inflation data showed annual price gains slowed to 7.7% in October from 8.2% in the prior month and below the expected 8% rise.
While a month or two of slowing price increases does not make a trend, some investors hope inflation may have peaked as commodity prices, shipping rates, and other indicators retreat from record highs.
The market seems to believe this data will convince the Fed to slow its pace of interest rate hikes, reducing the odds of a severe recession and setting the stage for rate cuts once inflation is decisively tamed.
But the big question is where inflation levels off as price increases remain well above many central banks’ long-term targets near 2%.
Source: Financial Times

We cannot predict the path inflation takes from here, but some degree of economic pain seems likely as price pressures persist and borrowing costs track higher with central bankers’ rate hikes.
As of early October, approximately 41% of Americans had difficulty paying for essential household expenses, up from 29% a year earlier, according to a Census Bureau survey. Household sentiment has not been this weak since the depths of the 2007-09 financial crisis either.
Source: Wall Street Journal

Brian Cornell, Chairman and CEO of Target, provided a similarly gloomy take when discussing the big-box retailer’s disappointing earnings results on November 16:
“Consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates, and an elevated sense of uncertainty about their economic prospects. With high rates of inflation continuing to erode their purchasing power, many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets. But for many consumers, those options are starting to run out. As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price.”
That said, plenty of indicators show the U.S. economy remaining on solid footing for now. Corporate earnings have continued to grow, unemployment is near a half-century low, and households’ net worth is higher compared to pre-Covid for every single income quintile.
Amidst these conflicting indicators, news headlines and narratives can change quickly. Investors must guard against getting caught up in the noise.
As conservative dividend investors, we don’t need to worry much about whether a recession takes hold in 2023 or how the stock market performs in the short term.
The companies we like generate reliable cash flow. Their products and services solve timeless problems. And they are managed conservatively with prudent capital allocation policies.
Dividends paid by these built-to-last businesses are likely to be sustained or increased even during periods of rising interest rates, falling demand, and slumping stock prices.
If you’re looking for income ideas that can withstand many of these risks, you might be interested in the recession-resistant dividend stocks and high dividend stocks we analyzed recently.
Focusing on the safety and stability of your portfolio’s income stream rather than its day-to-day fluctuations in value can also make it easier to stay the course when the tide goes out.
Our dividend tracker, portfolio tools, and research help investors tune out the noise by highlighting what matters, and nothing more. 
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