The stock market has been on an incredible winning streak over the last two weeks, rallying in 10 of the past 11 trading sessions. And a lot of investors have been worried that this bullishness is just another head fake. But we think today’s soft inflation report confirms that this rally is the real deal – and that it’s just getting started.
October’s consumer price index (CPI) report was released this morning, and it was about as positive for stocks as it could’ve been. That’s why the entire market is up about 2% today alone as I write.
Stocks are in full-on breakout mode. Why? Because inflation is dying.
The Inflation Collapse Is Underway
Headline CPI rose just 3.2% in October, below estimates for a 3.3% rise and down significantly from September’s 3.7% inflation rate. On a month-over-month basis, prices were flat in October. That’s the first time they’ve fallen flat all year long.
Yes, while lower than expected, a 3.2% inflation rate is still above the Fed’s 2% target. But that’s why the month-over-month rate is so important.
Prices were flat in October, and the Cleveland Fed’s current estimates see prices falling flat again in November. If this trend of flat month-over-month prices continues, then we should return to 2% inflation by March 2024 – in just four months!
You may be asking, is it really possible for prices to flatline for the next four months? Or for inflation to return to “normal” by early next year?
Absolutely. The only thing holding up inflation right now are housing costs; and those are in the process of crashing.
Housing Inflation Is Rolling Over
Excluding shelter, CPI rose just 1.5% in October. In other words, when you exclude things like rent and mortgage payments, inflation is running substantially below the Fed’s 2% target.
Outside of the housing market, the Fed has decidedly won its fight against inflation.
In other words, all we need to do to win the fight against inflation is to tackle housing inflation.
And that’s already happening.
Home prices have flatlined as an 8% 30-year mortgage rate crushes homebuying demand. And due to a huge influx of new supply, rents are actually coming down across the country. Fun fact: New apartment construction in the U.S. is running at its highest level since the 1970s.
As a result, according to Zillow’s observed rent index, real-time measures of asking rents across the country have been steadily dropping for the past 18 months.
Now, because shelter CPI uses actual rents as a proxy for housing inflation (not asking rents), this disinflation is just starting to be reflected in the official shelter CPI number. Of course, since renters usually sign 12-month leases, asking rents lead actual rents by about 12 months. It should be no surprise, then, that the official shelter CPI number follows Zillow’s observed rent index, with about a 12-month lag.
True to form, while Zillow’s rent index peaked 18 months ago and has been crashing since, shelter CPI peaked six months ago at 8.2%. It has since come crashing down.
Assuming this trend continues to hold true, Shelter CPI will collapse to 2% within the next 12 months.
The Final Word
Let’s connect the dots here.
Excluding housing costs, the U.S. inflation rate is running at just 1.5% right now.
Leading indicators of housing costs suggest that over the next 12 months, the housing inflation rate will collapse toward and potentially below 2%.
And at its current pace, the overall inflation rate in the U.S. will hit 2% within four months.
So much for ‘sticky inflation.’
The truth is this bout of inflation was never sticky. It was driven by unprecedented COVID-era supply chain challenges and money printing. Both anomalies have since been resolved. Supply chains are fully operational once again. And instead of stimulus checks, we’re dealing with double-digit financing rates.
For the first time since this wave started, there is a clear and viable pathway to 2% inflation within months.
And that, of course, is very bullish for stocks.
If we reach 2% inflation within four months, the Fed can start cutting rates, the economy can start to rebuild strength – and stocks can and will soar in 2024.
You heard it here first. We’re sprinting into a new bull market, and 2024 will be a fantastic year for stocks.
It’s time to get prepared for this emerging bull market.