The pandemic and its aftereffects turned millions of everyday Americans into armchair economists…
Inflation became a part of casual conversation as it hit the grocery stores. I’ve heard plenty of nonfinancial folks explain why the Consumer Price Index undersells reality… or why it’s a less useful measure today because of the lag in shelter data.
I love seeing people get more interested in finance. But to me, there’s no need to get into the nitty-gritty of what makes up the monthly inflation data. We don’t have to zoom in that far to see what’s coming next.
Instead, we need to understand where we are… where we’re likely headed… and how the Federal Reserve will view what’s coming.
Once you do that, a clear picture emerges. It tells us that the inflation “boogeyman” of 2022 will be dead by March… And that will set the stage for a massive market rally in 2023.
Let me explain…
The Fed hiked rates like crazy last year to try to get inflation under control. Those hikes were the main reason why stocks fell last year…
The effective federal-funds rate soared from 0% at the start of 2022 to 4.25% by the end of the year.
A lot of folks expect those massive rate hikes to continue. History shows that extreme inflation doesn’t usually fall until the fed-funds rate rises above the current inflation rate… And we’re not there yet. Not even close.
The December inflation data came out earlier this month. Year-over-year growth hit 6.4% on a seasonally adjusted basis. That’s down from the high of 9% we saw last June… But it’s still well above the Fed’s 4.25% interest rate.
So like most folks, you might assume the Fed will have to keep hiking rates to tame inflation. But that logic is missing a key shift in what really matters – the direction of inflation.
We covered this recently in DailyWealth. Stocks tend to soar in years when inflation is falling. And that’s the setup we’re starting to see…
Inflation growth began to slow dramatically last July. In the four months prior, inflation was up an average of 1% month over month. But in the six months since, that has dropped to just 0.16% per month, on average… And the December data was down versus the prior month.
Overall, we’ve seen an 80%-plus reduction in month-over-month inflation growth. That’s why the year-over-year number keeps falling.
Now, with six months of very low month-over-month inflation growth, it’s logical to assume that decline will continue. And if it does, inflation is going to fall faster than almost anyone realizes.
The table below shows the year-over-year inflation going forward, assuming the monthly increase is 0.16%. Take a look…
If the current trend continues, inflation is going to crater in the months ahead. It could be below 6% in January… down to 4.1% in March… and back to pre-pandemic levels by June.
This swift drop is not what the typical “man on the street” – or even many financial experts – would expect from here. But it’s the likely scenario given what we’ve seen in recent months. And it has massive implications.
Remember, the effective fed-funds rate is 4.25% right now. That means the Fed has already hiked interest rates above the likely March inflation rate. That’s the key level that most professionals look to as the time when the Fed will be able to ease off the brakes.
So there’s a good chance we’ll only see one more rate hike. Then, the Fed can back off – potentially even cutting rates later in the year.
This is far from the consensus view. But it makes sense based on where things are headed today. And it’s a powerful shift for investors.
The headwind that crushed markets in 2022 will no longer be a concern… setting the stage for massive stock market gains in 2023.
Last year, it was smart to be cautious. But the world has changed. And if you’re not positioned for a positive move in 2023, you’ll likely regret it.
Good investing,
Brett Eversole
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Source: Daily Wealth