It has truly been an awful third quarter for stocks. The S&P 500 lost as much as 7% throughout August and September. But thanks to this morning’s good inflation report, this late-summer slump may have ended today.
August’s personal consumption expenditures (PCE) report was released this morning. It missed expectations across the board and showed that inflationary pressures were much less intense than previously expected.
According to that report, inflation rose just 0.4% month-over-month in August, slower than the 0.5% expected by economists. And core inflation rose just 0.1% month-over-month, also slower than the 0.2% expected by economists. In fact, the core rate dropped by 42 basis points from July to August. That’s the biggest monthly slowdown we’ve seen since the COVID-19 pandemic began in early 2020.
Across the board, August inflation was softer than expected.
More importantly, though, this report should mark the end of the “summer of reinflation.”
Inflation Is On the Decline Once Again
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 today.
After correctly forecasting a rise in July and August, the Cleveland Fed’s Nowcasting Model forecasts that the inflation rate will drop next month.
Therefore, it seems highly likely that the summer of reinflation is over. Now we should shift back into a falling inflation regime.
The Final Word
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.
Today’s PCE report may mark the end of stocks’ late-summer slump – and the start of a big year-end rally.
And we think we have the perfect stocks for you to play that rally with.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.