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Volatility Spikes as Inflation Resurfaces: Stocks to Watch

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Volatility has a way of creeping up when we least expect it.

It seemed like the market was humming along to the Fed’s narrative heading into the week, with stocks hovering near all-time highs. But the latest inflation report had other plans.

Rate-cut hopes dwindled following hotter-than-expected inflation data, with stocks experiencing heavy selling pressure as a result. Yesterday’s release of the consumer price index (CPI) figures showed that prices rose 0.4% over the previous month and 3.5% year-over-year in March, an unexpected uptick from February’s 3.2% annual gain in prices. Both measures were ahead estimates that called for a 0.3% monthly gain and 3.4% annual increase.

On a “core” basis (which strips out food and energy), the CPI rose 0.4% on the month and 3.8% over the last year, also above estimates.

Expectations for rate cuts notably shifted following the hot print. For the first time in 2024, market participants are now expecting just two rate cuts, with a June cut looking increasingly unlikely. Minutes from the Fed’s latest meeting also showed that members remain concerned with cutting rates too soon.

This morning eased concerns a bit, with the producer price index (PPI) slowing to a 0.2% monthly gain, less than the 0.3% median projection. Still, the measure of inflation at the wholesale level ticked up to 2.1% on a 12-month basis, the biggest gain since April of last year.

Volatility was picking up to begin with in April, and the recent inflation data only worsened the cause. The widely-followed volatility (VIX) index appears to be breaking out to year-to-date highs.

Bulls would like to avoid a breakout in the VIX index, as a rise in volatility tends to coincide with lower stock prices. From a longer-term perspective, spikes in volatility can represent lower-risk entry points in leading stocks.

Early in Thursday’s trading, the Dow was lagging on inflation worries and is now up a paltry 1.5% on the year. The major industrial average appears to have topped out in the short-term as signs of distribution persist. Meanwhile, small-caps have been hardest by the idea of higher rates for longer, as the Russell 2000 index tests a failed breakout look and is now flat on the year.

Stocks to Watch Amid Inflation Revival

A few stocks have been bucking the downward trend despite the hot inflation print. Tecnoglass (TGLS - Free Report) stock hit an all-time high this week, breaking out of a long consolidation pattern. Tecnoglass produces, markets, and installs architectural systems for commercial and residential construction industries.

Tecnoglass is part of the Zacks Building Products – Retail industry, which is currently ranked in the top 29% of all Zacks Ranked Industries. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market.

Quantitative research studies have shown that roughly half of a stock's price movement can be attributed to its industry group. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

TGLS stock has been steadily outperforming this year, advancing more than 26%:

Image Source: StockCharts

Another stock and one of the east coast’s favorite wholesale clubs, BJ’s (BJ - Free Report) hit a 52-week high on Thursday morning. BJ’s ability to navigate through the tough retail environment is a testament to its strong customer base and business model. The company has shown a relentless effort to simplify assortments, enhance digital capabilities, and accelerate club openings.

BJ stock continues to trend upward, climbing more than 18% year-to-date:

Image Source: StockCharts

BJ’s has established an impressive earnings history, surpassing estimates in each of the last four quarters. The domestic operator of warehouse clubs most recently announced fourth-quarter earnings of $1.11/share, a 4.72% beat over the $1.06/share consensus estimate. BJ’s delivered a trailing four-quarter average earnings surprise of 4.21%.

What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. The idea is that this recent information can serve as a more accurate predictor of the future, which can give investors a leg up during earnings season.

The technique has proven to be quite useful in finding positive surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks delivered a positive surprise 70% of the time according to our 10-year back test.

BJ stock is a Zacks Rank #3 (Hold) and boasts a +1.79% Earnings ESP. The company is expected to report its Q1 results in May.

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

BJ's Wholesale Club Holdings, Inc. (BJ) - free report >>

Tecnoglass Inc. (TGLS) - free report >>

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