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Current DateTime: 10:19:49 14 Nov 2009
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Current DateTime: 10:19:51 14 Nov 2009
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By: Jeff Cox, , Special to CNBC.com | 14 Aug 2008 | 01:14 PM ET
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Even in the face of economic numbers seemingly showing a big pop in the Consumer Price Index, investors have begun to consider inflation almost an afterthought.

Sharply declining energy prices, which have translated to an 8 percent drop at the gas pump in the past month, have analysts convinced that the CPI is a lagging number and thus not relevant to the future landscape.

As such, investors are getting a bit more daring with their choices and starting to show more confidence in the stock market.

"These inflation numbers are really a head-fake here," David Kelly, chief market strategist at JPMorgan Funds, said on CNBC shortly after the CPI numbers came out. "The gap between overall inflation and core inflation now is the biggest gap seen since 1974, and that reflects a commodities bubble and that bubble is bursting."

That has Kelly feeling better about equities and long-term investing in general after a protracted trader's market that scared a lot of money to the sidelines. Wall Street followed suit and sent stocks up substantially despite the CPI news.

Health Care, Big Names in Vogue

"We've moving from a Mini-Me recession into a mild expansion, and in that environment I think stocks in general are relatively cheap," Kelly added. "I do like health care and technology, but I think the most important thing is to have a good position in long-term assets in this market."

Kelly suggested high-yield bonds, perhaps municipals, as well as some stocks.

"I don't like Treasurys, but I think people need to take on board a little risk here because I think the return will eventually be there," he said.

See Kelly's analysis in video at left.

Also look for investment advisers to start moving into some larger-caps, such as Dow components and other good names, that suffered under the notion that soaring transportation costs brought on by commodity gains would weigh on balance sheets.

Indeed, bluechips registered particularly strong gains Thursday, with investors favoring General Motors [GM  Loading...      ()   ], American Express [AXP  Loading...      ()   ] and a host of financial names.

"When you're in market corrections it really gives the investor the opportunity to shore up portfolios," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "It allows them to take a like to high-quality equities."

Baum likes Coca-Cola [KO  Loading...      ()   ], Kimberly Clark [KMB  Loading...      ()   ] and AT&T [T  Loading...      ()   ] as "value stocks with a little growth story" that will rebound now that inflation fears have abated.

"Sentiment is starting to turn a little bit," he says. "I don't think the real optimistic strategists are thinking the end of this year is going to be great. I'm stretching it into the middle of '09. At that point the market gets a little firm footing."

Just in Case

Not everyone is convinced that inflation is heading for an immediate turnaround, and are making plays to reflect the current, if not long-term, reality.

Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif., likes food companies such as Tyson [TSN  Loading...      ()   ] that have already raised their prices and are unlikely to back off just because the economy improves.

That said, Hanlon sees inflation beginning to tame, though slightly, and the market setting up for buying opportunities based on that trend.

"We're getting to a point where now the data tells a reality but it tells a little bit of a backward-looking reality," he says. "We're getting to the last stages of this. But as inflation ripples though, I think these CPI reports will probably continue to be ugly through year's end."

Hanlon advocates a cautious but broad approach to buying stocks as inflation winds down.

"You'll want to buy stocks before the economy improves," he says. "Sometime over the next few months as people are nibbling on stocks, I think they're going to be pretty happy they did."

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