U.S. inflation update: S&P 500 could tank another 21% from here

S&P 500 opened in the red on Tuesday after the U.S. Bureau of Labour Statistics said consumer prices were up more than expected in January.

Strategist warns of a massive downside

For the month, the consumer price index came in up 0.5% on the back of an increase in shelter, gas, and fuel prices. In comparison, economists had expected a 0.4% gain instead.

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More alarmingly, a Piper Sandler strategist is now calling for a sharp decline in the benchmark index to 3,225 level by the end of 2023. On CNBC’s “Squawk Box”, Michael Kantrowitz said:

These hot inflation numbers of the past, plus the Fed’s tightening cycle, plus the fact that banks have been tightening lending standards for well over a year; that combination has preceded every single recession.

For the year, inflation was still at 6.4% in January versus 6.2% that economists had forecast.  

Core inflation also came in hotter than expected

Core CPI (excluding food and energy) was up 0.4% for the month and 5.6% on a year-over-year basis in January. Estimates were for 0.3% and 5.5% increase, respectively.

At writing, the equities market is keeping comfortably above the 4,100 level. Kantrowitz’ call, therefore, suggests a whopping 21% downside from here.

First impact of Fed tightening cycle comes through PE compression. That was last year. The next effect, a long and variable lag hits the economy about 15 to 18 months later. I think the large majority of that is still ahead.

The Piper Sandler strategist sees unemployment rising to at least 4.4% by the end of the year.