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Nov. 17, 2021, 5:17 p.m. EST

Inflation in ‘process of peaking,’ but still poses threat to investor portfolios, says Wells Fargo

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By Christine Idzelis

Investors are watching closely for any signs that the surge in the cost of living during the pandemic may be starting to ebb, with Wells Fargo Investment Institute among financial firms pointing to possible relief ahead.

“Inflation is in the process of peaking out,” Scott Wren, senior global market strategist at Wells Fargo Investment Institute, told MarketWatch in a phone interview. The recent decline in prices of raw materials for finished goods may be a sign of that, he said, as the ups and downs in costs of finished goods typically follow raw-materials prices with a lag. 

Raw-materials prices may have “peaked out,” Wren said, referencing a chart in a Wells Fargo Investment Institute report this week (see below).

Price changes in raw materials tend to predict consumer inflation 12 months ahead, according to the report, which was co-authored by Wren and Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.

“If the broad trend continues, we expect consumer inflation to slow somewhat by midyear and materially by year-end 2022,” Wren and Christopher wrote. “Lumber, copper, and soybean prices, for example, are significantly lower than they were earlier in the year and holding.”

Read: Why investors should buy the dip in copper over the next 3 months amid a commodity ‘supercycle’

In futures trading Wednesday, December copper fell 2% to $4.266 a pound. That’s below price levels of more than $4.70 seen in mid-October and May for the industrial metal, but still above the beginning of 2021 when copper was quoted below $4 a pound.

U.S. inflation jumped in October, pushing the year-over-year rate to a 31-year high of 6.2%, as measured by the consumer-price index. Meanwhile, the rise in the producer-price index in October showed the 12-month pace of wholesale inflation was high — but flat — at about 8.6%.

While the higher cost of living, as measured by the CPI index, may remain elevated into next year, Wren said that it’s probably in the “process of topping out.” Wells Fargo is now estimating that the pace of inflation may decelerate to around 4% next year, he told MarketWatch.

Related:WIN’ buttons look like a terrible inflation hedge, but here’s what they say about the battle against rising prices

In another sign that inflation could ease, “from the suppliers’ side, factories in Asia are reopening and some transportation costs are peaking,” Wren and Christopher wrote in the Wells Fargo note. 

Frost Investment Advisors also pointed to declining shipping costs in a recent report.

“We’re seeing some early signs that the trade bottlenecks may be easing a bit,” Frost said in its note on market news and views for the week of Nov 8. “While the number of ships anchored off California waiting to unload is still very high, freight rates appear to be moderating, both for containers and for trucking.”

While rates remain “quite high,” Frost said “any improvement is welcome.”

The course of inflation is important for investors to watch as it’s “one of the most prominent risks to portfolios today,” according to the Wells Fargo report. “We believe inflation will moderate in 2022, but we expect the path to lower inflation to begin with higher inflation in the front half of the year.”

For tactical positioning over the next year and a half that considers “above-average inflation,” Wren said by phone that “we want to lean toward recovery” and into cyclical sectors such as industrials, commodities and financials. As for the energy sector, Wells Fargo recently shifted to “even” weight from overweight, he said, explaining that energy has seen “a pretty outsized run.”

“So we took a little money off the table there,” he said. 

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