After staging one of its biggest rallies ever throughout the first seven months of the year, it seems the stock market can’t stop falling in August. The issue: inflation – or more specifically, reinflation.
From June 2022 to June 2023, inflation rates across the U.S. economy crashed. The headline consumer price index inflation rate hit 9.1% in June 2022. By June ‘23, it had dropped below 3%.
That steady pace of disinflation drove a steady pace of stock gains.
But that disinflation trend just ended.
CPI rose 3.2% in July, higher than the 3% rate reported in June. It was the first time since summer 2022 when inflation accelerated month-to-month.
Now everyone is worried about inflation heating back up. These reinflation fears are the primary driver of the stock market’s August selloff.
But we believe these reinflation fears are way overblown.
Why? Inflation rates slightly reaccelerated in July specifically because commodity prices rebounded that month.
And that commodity rally is already over.
Crashing Commodity Prices Suggest Reinflation Isn’t Happening
Here in August, commodity prices have resumed the same crash they experienced from summer 2022 to summer 2023.
Take oil, for example.
Oil prices surged from $67 to $85 throughout July and into early August. But over the past two weeks, they’ve since crashed back below $79.
Meanwhile, copper prices are at a two-month low. Wheat prices are at a three-month low. And nickel, cattle, and natural gas prices have all been falling.
In other words, commodity prices surged throughout July. And now they’re giving back a big chunk of those gains.
The implication: whatever supposed reinflation we saw in July is already over.
Just look at how closely related commodity prices and inflation are. When commodity prices rise, inflation rates rise. And when commodity prices fall, inflation rates fall.
Commodity prices fell from June 2022 to June 2023. Inflation rates fell over that same stretch, too.
Then, commodity prices rose in July. And inflation rates rose, too.
Now commodity prices are falling again in August. That means inflation rates should fall again, too.
The Final Word
In other words, the main driver of the August stock market selloff – reinflation fears – is already old news. Crashing commodity prices ensure that the disinflation trend is already back.
With continued disinflation, stocks will rebound.
So, that means recent volatility has simply created some really good buying opportunities.
We found one such great buying opportunity yesterday.
The recent stock market selloff has left one AI tech stock trading at just 10X forward EBITDA estimates. Meanwhile, analysts believe the firm will experience 20%-plus profit growth over the next several years.
This stock is also trading at its cheapest valuation ever and has hit critical technical levels, suggesting it is ripe for a huge rebound.
We think this stock could double before the end of the year.
And yesterday, we added it to our model portfolio.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
