The Inflation Report Is a Gift in Disguise

By TradeSmith Research Team

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By Lucas Downey, Contributing Editor, TradeSmith Daily

Oh no, inflation is back!

Or is it…

The mainstream media will have you believe we have an inflation problem after January’s hotter-than-expected reading.

Expectations called for 2.9% year-over-year price gains, yet the Consumer Price Index jumped to 3.1%.

This sent stocks plunging, with the small-cap Russell 2000 off over 4%.

But if you’re feeling skittish about stocks, I’ve got some cold, hard data for you to chew on.

Today, we’re going to unpack the real inflation story… what it means for the Federal Reserve… and ultimately what it’ll likely mean for your portfolio.

Before you hit the sell button, consider the following facts… Because they’ll make that nasty inflation print look like a gift in disguise.

The True Path of Inflation

To say inflation “spiked” is a bit of an exaggeration.

While the January Consumer Price Index (CPI) did indeed rise above the 2.9% expectations, a 3.1% lift isn’t the end of the world.

In fact, when you review all monthly CPI readings since 2021, you’ll notice that January came in at the second-lowest reading since March 2021, when prices rose 2.6%.

There’s a lot of quibbling these days about the future path of inflation, but don’t get too caught up in the weeds.

The path of least resistance is lower.

Below illustrates this beautifully. Not only has inflation tamed since peaking in June 2022 at 9.1%, but it’s stayed low ever since:

The balloon we watched inflate for nearly a year has deflated.

This shows us inflation isn’t spiking… it’s just stubbornly flatlining.

That’s why we should focus on the longer-term trend. Inflation is way down from its highs, and you can thank Fed policymakers for that.

Back in July 2023, the Fed finally ended its hiking campaign, taking Fed Funds interest rates well into restrictive territory at 5.50%.

Two months later, we put out a great research piece highlighting how stocks perform after the final rate hike. Armed with data, we told you to prepare for upside.

Here’s an update on that study, including July’s final rate hike and the returns since we published it.

Once the final hike is in, the S&P 500:
  • Lifts 3% three months later
  • Jumps 8.1% six months later
  • Rips 15.7% 12 months later

Clearly, the 9.4% drop we experienced in the three months following last July’s hike didn’t fit in line with history.

Instead, we got one of the greatest bear-killer signals right around that time, which helped the S&P 500 rise 8.1% in the six months after July’s final hike.

But that was then. What about now?

Well, if you think I’m going to become some angry bear, think again. Knowing that the inflation fight is in the bag for the Fed, the next move is clear, and inevitable…

The Major Takeaway from January’s Inflation Reading

As they say on Wall Street, it’s not where we are that matters, it’s where we’re going.

Focusing on inflation’s tiny tug-of-war is missing the forest for the trees.

The Fed has already pivoted and signaled that cuts are coming. The timing isn’t exact, but most analysts see the first cuts coming as early as the middle of 2024.

Let’s now visit history and gauge what that means for stocks… Since 1921, the Dow Jones Industrial Average (DJIA) clocks in a market-beating performance once the Fed eases.

After the first Fed rate cut, the DJIA:
  • Rips 10.2% six months later
  • Soars 15.2% 12 months later

This right here is the price regime we’re entering.

Rate cuts could be delayed, but they’re the next piece of the inflation puzzle.

So, don’t let scary headlines spook you out of stocks. One look at the true path of the CPI tells you all is OK.

It’s not IF the cuts are coming, it’s WHEN.

That’s why using data is so important. It takes the emotional ebbs and flows out of investing.

Having a data-based approach allows TradeSmith to stay a step ahead of markets… isolating the best stocks out there.

Get started today!


Lucas Downey
Contributing Editor, TradeSmith Daily