Sticky Inflation? Insights from Commodities and Stocks

Tariffs and Inflation: BNY Wealth CIO Says It’s ‘Far Too Early’ to Predict Significant Impact

Inflation Concerns Resurface as Investors Eye Policy Shifts
U.S. financial markets are grappling with renewed inflation fears following President-elect Donald Trump’s victory, as investors weigh the potential impact of proposed policies like tax cuts and import tariffs. These measures, some argue, could exacerbate the fiscal deficit and fuel inflation.

The 10-year Treasury yield has risen 14 basis points since Nov. 6, reflecting these concerns. However, markets have shown resilience: the S&P 500 has gained over 3%, the Dow Jones Industrial Average nearly 5%, and the Nasdaq Composite around 3%, according to FactSet. Yet, uncertainty lingers as investors try to decipher mixed signals from various asset classes.

Oil and Gold Respond, but Inflation’s Role Remains Clouded
Oil and gold prices have surged recently, although analysts attribute much of the movement to geopolitical tensions rather than inflation fears.

U.S. crude oil futures jumped 6.5% last week to settle at $71.24 a barrel, while gold, often seen as an inflation hedge, posted a 5% weekly gain, closing at $2,712.20 an ounce. Brian Szytel, co-CIO at the Bahnsen Group, suggested that Trump’s pro-energy policies could increase supply and weaken the traditional link between oil prices and inflation.

Value, Growth, and Small Caps: Market Shifts in Focus
In periods of inflation, value stocks often outperform growth stocks, as seen during 2022’s inflation surge. The Russell 1000 Value Index outpaced its growth counterpart last year, and it rose 2.4% last week compared to the Russell 1000 Growth Index’s 1.7% gain. However, analysts like Szytel argue that value stocks are currently attractive more for their valuation dynamics than inflation concerns.

Meanwhile, small-cap stocks, which typically benefit from reflation and economic growth, have outperformed in recent weeks. The Russell 2000 Index climbed 4.5% last week, supported by optimism around Trump’s tax-cut proposals and a potential resurgence in domestic manufacturing.

Tariff Impact: Too Soon to Draw Conclusions
Sinead Colton Grant, CIO at BNY Wealth, cautioned that it’s “far too early” to conclude that tariffs will lead to “significantly higher inflation.” She noted that market signals across asset classes remain mixed and suggested that policy measures are unlikely to exacerbate inflation significantly, given voters’ sensitivity to rising prices.

Grant also pointed out that upcoming data, including Wednesday’s personal consumption expenditures price index, could shape the market narrative. A higher-than-expected reading may dampen sentiment and challenge the stock market’s year-end rally.

Key Earnings Reports Ahead
As the Thanksgiving holiday approaches, the earnings calendar includes major retailers like Best Buy, Macy’s, and Nordstrom, as well as tech giants like Dell and CrowdStrike. These results could provide fresh insights into consumer sentiment and corporate performance amid lingering inflationary concerns.