The upcoming inflation report could spark the stock market's next big sell-off, Fundstrat says

  • The next big catalyst for the stock market is the February CPI inflation report, according to Fundstrat.
  • It will be released on March 12 and will signal to investors whether the Federal Reserve could cut interest rates soon.
  • "We wonder if this is potentially the fundamental catalyst for a sell-off," Fundstrat said.

The next big catalyst that could shake up the stock market is the February CPI report, according to a recent note from Fundstrat.

The inflation reading, due on March 12, will tell investors whether the Federal Reserve could cut interest rates soon.

"For us, this is also the decision point for markets in 2024. If February CPI is 'hot', even if for statistically erroneous reasons, we think markets could get anxious," said Fundstrat's Tom Lee.

The February inflation report will follow a better-than-expected January CPI report, and Lee noted that some of the seasonality driving higher prices in January could extend into February.

Citing economist Jens Nordvig, Lee explained that companies often increase their prices in January, and some of those price increases occur later in the month after the January CPI survey period. That means price increases that occur at the end of January don't appear until the February CPI report.

"Historically, a 'hot' January CPI tends to be followed by a 'hot' February CPI. That is, the residual seasonality that tends to drive a higher January often extends into February," Lee said.

Ultimately, if the February CPI report turns out to be higher than expected, it could put the Federal Reserve in a difficult position and lead to more aggressive behavior by the central bank, as two consecutive CPI reports would cause Investors will wonder how many times they could cut interest rates this year? if they do.

And that's why an interesting February CPI report could spark the most significant sell-off in the stock market since its record rally began in late October.

"It looks like the Fed can't ignore the optical issue of two CPI figures that appear to be breaking the downtrend. Therefore, it looks like stocks could see selling pressure immediately after this," Lee said.

"And while it's just a short-term rise that could reverse in March/April, given the stock's considerable rise since October 2023, we wonder if this is potentially the fundamental catalyst for a sell-off," Lee said.

Lee has suggested that the S&P 500 could see a 7% sell-off in early 2024, which would send the index to 4,777, which is right around the stock market's previous all-time highs.

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