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

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, which is scheduled to be released on March 12, will signal to investors whether the Federal Reserve could soon cut interest rates. “To us, this is also the decision point for markets in 2024. If the Feb CPI is ‘hot,’ even if for statistically wrong reasons, we think markets could become anxious,” Fundstrat’s Tom Lee said. The February inflation report will follow a hotter-than-expected January CPI report, and Lee highlighted that some of the seasonality that drives higher prices in January could spill over into February. Citing economist Jens Nordvig, Lee explained that companies often raise their prices in January, and some of those price increases occur later in the month after the January CPI survey period. That means the price increases that occur in late January don’t show up until the February CPI report. “Historically, a ‘hot’ Jan CPI tends to be followed by a ‘hot’ Feb CPI. That is, the residual seasonality that tends to drive a higher Jan often spills into Feb,” Lee said. Ultimately, if the February CPI report does come in higher than expected, it could put the Fed in a difficult position and lead to more hawkish behavior from the central bank, as two back-to-back hot CPI reports would cause investors to question just how many times they might cut interest rates this year, if they do at all. And that’s why a hot February CPI report could spark the most significant sell-off in the stock market since its record rally began in late October. “It seems like the Fed cannot ignore the optical issue of two CPI prints that appear to be breaking the downtrend. Thus, it seems like stocks could see selling pressure on the heels of this,” Lee said. “And while it is just a short-term rise that could reverse in March/April, given the sizable rise in stocks 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 experience a 7% sell-off in early 2024, which would send the index down to 4,777, which is right around the stock market’s prior record highs.