The summer of reinflation is over … Luke Lango’s market forecast … Louis Navellier is bullish despite soaring treasury yields … the S&P sits at a critical technical level … the sector Louis likes now

 

Luke Lango says the “summer of reinflation” is done, and the market is gearing up for a big year-end rally.

Last Friday’s personal consumption expenditures (PCE) report was one of the latest data points informing Luke’s forecast. As you likely read, it came in lower than forecasts, showing further price easing in August.

Here’s how Luke sees that report fitting into the broader inflation picture:

From June 2022 to June 2023, the inflation rate steadily declined. We rattled off 12 consecutive months of slowing inflation, one of the longest streaks in American history.

But in July 2023, that streak broke. The inflation rate rose from June to July, then rose again from July to August.

In other words, after 12 straight months of disinflation, we have now seen two straight months of late-summer reinflation.

And we believe that reinflation trend likely ended [last week].

To support his belief, Luke points toward the Cleveland Fed’s Nowcasting Model, which we’ll show you below.

The model’s forecasts are in blue with PCE inflation in white. You’ll see the blue forecast line turns lower again for September. It’s a little difficult to see, but Luke has drawn in a “down” arrow in white, suggesting that’s what we’ll see when the inflation data comes out.

Why falling inflation will ignite a market rally

Let’s jump back to Luke for the recent relationship between the market and inflation:

Lots of factors drive the stock market. But over the past two years, inflation has been arguably the most important market driver. 

When it goes up, stocks go down. When it goes down, stocks go up. 

From early to mid-2022, the inflation rate spiked, and stocks sank. Then, from mid-2022 to mid-2023, that rate crashed, and stocks soared.

Over the past two months, the inflation rate started to move higher once again. As it did, stocks declined. 

Now rates should start to fall again. And as a result, stocks are likely to rally. 

[Last week’s] PCE report may mark the end of stocks’ late-summer slump – and the start of a big year-end rally.

For more of Luke’s analysis as an Innovation Investor subscriber, click here to learn more.

Legendary investor Louis Navellier also sees bullishness on the way

In yesterday’s Special Market Podcast from his Platinum Growth Club service, Louis mapped out what we can expect for the market all the way to spring 2024.

Here are the details:

September is over, so the seasonally weak time of year has ceased.

October is a seasonally strong month in the last 30+ years. That strength tends to build more in the second half of October as earnings come out. So, there could be a lull here and some profit taking, but I do want to assure you that the seasonally strong time of year is now here.

It will accelerate in November, stall a bit in December, reaccelerate in January, stall in February, and then get its mojo back in March, April, and May. That is what’s going to be happening.

Despite this optimistic outlook, Louis points toward two clouds overhanging the market: the surging 10-year Treasury yield and complications from the United Auto Workers strike.

Beginning with yields, as we’ve pointed out here in the Digest, the 10-year yield has surged to its highest level since 2007 in recent weeks. As I write Tuesday morning, it’s breaking out to its latest recent high of 4.78%, creating an enormous headwind against stock prices.

Here’s more from Louis:

The bad news is that treasury bond yields are up.

The 10-year treasury yield is 4.63% [yesterday’s data], and a lot of people think that yields are going to 5%. That is the problem.

As to the United Auto Workers (UAW) strike, Louis provides a fascinating overview of the EV industry, focusing on the batteries that are being used. The eventual takeaway is that China is building double the battery manufacturing capacity that it needs. These extra batteries can then be exported to the U.S. – potentially, at cheaper prices than what it would cost to manufacture here in America.

Clearly, if this part of EV production is outsourced to China, that’s fewer jobs here in the U.S. Louis notes that this is becoming a big sticking point with the UAW strike.

He then pivots to an interesting domino effect of the UAW strike on the supply chains:

We’re headed to 4%+ unemployment soon. The UAW workers don’t show up in unemployment because they have a strike fund.

But there are a lot of companies that have to now start shutting down as supply chains get busted up again. So, that is a big problem.

It’s an enormous problem for the Federal Reserve if snarled supply chains result in a resurgence of inflation. This is the last thing that Chairman Jerome Powell wants to see, potentially complicating the Fed’s tightrope act.

Despite these market overhangs, Louis is bullish for a handful of reasons.

First, he tells us that Wall Street will rally once bond yields stabilize.

Second, the market will enjoy another tailwind as strong earnings come out (Q3 earnings season unofficially begins next week).

Finally, Louis expects an additional market rally in his Platinum Growth Club portfolio when analysts upgrade their estimates on fundamentally superior stocks (Louis’ entire market approach centers on identifying fundamentally superior stocks with growing earnings).

The immediate hurdle for Luke’s and Louis’ bullish forecast is a critical technical level at which the S&P finds itself right now

One week ago, we noted that the S&P was about to face a major test that would make or break its short-term direction – its multi-month trendline.

When we published that Digest, the S&P was about 1% above that trendline. As I write, we’re sitting on it with zero breathing room.

If stocks can hold this level and rally, it will be an enormous win for the bulls, likely attracting more bullishness in expectation of a robust mean-reversion rally.

If we look at the S&P’s Relative Strength Index (RSI), such a mean-reversion rally is appearing more likely.

For newer Digest readers, the RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as a red-hot rally cools off) while a reading below 30 means it’s “oversold” (and poised for gains as bargain hunters look to take advantage of an overblown selloff).

Below, we look again at the S&P, adding its RSI in the lower pane. It’s now at 29 – clearly oversold. This is also the lowest level since September’s RSI low from last year that preceded the market’s October low (from which it saw a huge rally).

Also, note how the S&P performed the last two times the RSI traded at depressed levels.

Let’s cross fingers for an RSI reversal beginning this week, followed by the bullishness that Luke and Louis are calling for.

Before we sign off, what sector does Louis like today as we head into the fall/winter?

Energy – and we can thank El Niño for that.

Here’s Louis to explain:

El Niño controls the southern jet stream. It basically means the southern United States is going to be wet and colder than normal. And the northern part of the U.S. is going to be extra cold.

So, if you’re looking for where to invest, energy stocks are looking great.

Natural gas is going to be firming up big time as the weather gets colder and colder.

Putting it all together, keep your eyes on the S&P’s long-term trendline to see if we get that bounce… watch the 10-year treasury yield for signs of peaking and turning lower… look for bullish market momentum as inflation continues dropping this fall and earnings come in stronger than expected… and position your money in energy stocks ahead of a colder than usual winter.

We’ll keep you updated on all these stories here in the Digest.

Have a good evening,

Jeff Remsburg