Will high inflation kill the bull market in stocks? History says probably not

Bulls should take comfort in falling Treasury yields after CPI reading: RenMac's deGraaf

Rest easy, big fella. Jeff J Mitchell/Getty Images

U.S. inflation didn't run as hot as expected in August, but remains elevated and a source of worry for investors and policy makers. But by itself, a jump in inflation is hardly ever enough to derail a bull market in stocks, according to a top Wall Street technician.

"We can't find much evidence that spiking inflation figures are bearish for equities," said Jeff deGraaf, founder of Renaissance Macro Research, in a Wednesday note.

Renaissance Macro Research

In the note, which featured the chart above, deGraaf observed that inflation jumps "do tend to push against returns when they force the Fed's hand to kill the growth cycle, but we know that's not happening here yet."

The August consumer price index rose a less-than-expected 0.3% in August and that saw the year-over-year rate fall to a still-elevated 5.3% from 5.4%, the first such decline since October. The core rate, which excludes volatile food and energy costs, saw a 4% year-over-year rise versus 4.3% in July.

The drop was seen reinforcing the message from Federal Reserve Chairman Jerome Powell and other policy makers that rising inflation pressures were likely to prove "transitory," though economists said signs of underlying inflation pressures still raised alarms.

Meanwhile, long-dated Treasury yields declined following the CPI reading. While the data wasn't expected to alter the Fed's desire to begin scaling back its monthly bond purchases before year-end, analysts said the decline in yields reflected fading worries among bond investors that the Federal Reserve might be forced to raise interest rates by more than expected.

The yield on the 10-year Treasury note fell 4.7 basis points to 1.276% on Tuesday, its biggest one-day decline since Aug. 13. The yield continued to edge lower Wednesday, trading at 1.275%.

"The response from 10-year yields should provide some real--time comfort to those concerned that inflation measures are about to go off the rails," deGraaf wrote. "The fact remains that inflation expectations are a far better sentiment guide than they are a predictor of realized inflation."

Stocks have stumbled in September, with the S&P 500 retreating 1.8% in the month to date and taking it 2.1% below its record finish earlier in the month. The Dow Jones Industrial Average is off 2.6% so far in September.