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The Overlooked Difference in June's Inflation Report

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This morning, the Bureau of Labor Statistics reported that U.S. consumer prices surged 9.1% in June, marking the largest annual increase in more than four decades. Higher costs for gasoline, food, and shelter have stubbornly persisted as the summer has rolled along. But there’s one key difference between this report and May’s inflation reading (which was released in June).

And that difference is the market’s reaction to the news. The market is a forward-looking mechanism. Back on June 10th, the release of May’s inflation data (which also marked a 40-year high) coincided with a large gap down in the midst of a leg lower for stocks as we can see below.

StockCharts
StockCharts


Image Source: StockCharts

Today’s reaction to a high CPI print is the opposite. While futures pointed to a deeply negative open this morning, stocks have thus far rallied off the lows of the day and are currently in the green:

StockCharts
StockCharts


Image Source: StockCharts

It appears stocks have found support at an important level and are taking this higher inflation reading in stride. Maybe market participants found some positives in the report, signaling potential signs of inflation peaking. Or maybe selling pressure has become exhausted. Either way, the market’s reaction is noticeably different than last month.

What’s been leading on the way back up? One of the pockets of the market that has been outperforming since the mid-June bottom is biotechnology. The iShares Nasdaq Biotechnology ETF IBB has advanced about 17.4% since that date, nearly tripling the 6% return from the Nasdaq:

StockCharts
StockCharts


Image Source: StockCharts

The iShares Nasdaq Biotechnology ETF seeks to track the investment results of an index composed of U.S.-listed equities in the biotechnology sector. While IBB started off the year on a sour note along with the market, it has since turned back up and is making a series of higher highs.

Let’s take a look at a leading stock within the IBB ETF. This company is the largest holding within IBB at 7.31%. It is part of the Zacks Medical – Biomedical and Genetics industry, which currently ranks in the top 29% out of approximately 250 industries.

Vertex Pharmaceuticals, Inc. (VRTX)

Vertex Pharmaceuticals is a biotechnology company that creates transformative medicines for people with serious and life-threatening diseases. VRTX develops and commercializes therapies targeting disorders such as cystic fibrosis, kidney disease, diabetes, and musculoskeletal pain. The company has collaborations with several well-known players in the industry such as Moderna and CRISPR Therapeutics. Vertex Pharmaceuticals was founded in 1989 and is headquartered in Boston, MA.

VRTX has exceeded earnings estimates in three of the past four quarters, sporting an average +7.56% beat over that timeframe. The stock has responded favorably and has advanced nearly 33% this year alone.

StockCharts
StockCharts


Image Source: StockCharts

The estimates appear favorable for both sales and earnings, as this year they are expected to rise 13.3% (to $8.58 billion) and 8.6% (to $14.14/share), respectively.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Make sure to put VRTX on your watchlist as we head into the second half of the year.


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