Investors might want to keep their guard up as the stock market continues its rally.
“The market has kind of gone back to sleep” in appearing to think, “all right, mission accomplished, inflation’s in the bag, the Fed can back off,” said Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute, in a phone interview Wednesday. “We think it’s much too premature.”
Samana cautioned that inflation remains elevated even after easing in July. Core inflation, which strips out food and energy, will probably remain “stubbornly” high as areas such as wage growth and shelter costs tend to be stickier, which will probably remain a “problem” for the Federal Reserve, he said.
U.S. stocks rallied Wednesday, with the technology-heavy Nasdaq Composite entering bull market territory, according to Dow Jones Market Data.
Investors should remain defensive, according to Samana, who said that Wells Fargo likes healthcare and is overweight the sector while recently upgrading consumer staples and utilities to neutral. He expects a recession to start in the second half of this year, although “we don’t think equity markets are reflecting that.”
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Wells Fargo Investment Institute also likes energy and technology, said Samana.
“We like tech because of its focus on the business of the enterprise customer,” as opposed to consumers whose discretionary spending may crimped, he said. Samana said that “companies will probably make it through this next recession in slightly better shape than consumers, which will have a pretty difficult time with higher borrowing costs” and high inflation.
U.S. inflation, as measured by the consumer-price index, was unchanged in July, after jumping 1.3% in June, for an annual rate of 8.5%, the U.S. Bureau of Labor Statistics reported Wednesday. The pace of inflation over the past 12 months has slowed from 9.1% in June.
Read: U.S. consumer price inflation surprises to downside in July
July inflation was lower than…