The stock market has been on a torrid rally over the past month — one of its sharpest in 20 years — and today’s inflation report confirms that this frenetic rally will persist for the foreseeable future.
The October Personal Consumption Expenditures Report was released this morning. It includes the Federal Reserve’s preferred inflation gauge, the PCE price index. That index rose just 3% year-over-year last month, below estimates for a 3.1% increase and significantly down from the 3.4% rise reported in September.
In other words, inflation rates are falling significantly right now.
They are projected to keep falling, too. The Cleveland Fed’s Inflation Nowcasting model predicts the PCE inflation rate dropping to 2.8% next month. It also sees the core PCE inflation rate decreasing, confirming that disinflation is returning.
That’s important because inflation has been the nemesis of the stock market over the past two years.
Ever since late 2021, the paths of inflation and stocks have been inversely correlated.
When inflation rose in the first half of 2022, stocks fell.
When inflation dropped in the second half of 2022 and the first half of 2023, stocks rose.
When inflation rose again in late summer 2023, stocks fell again.
Now that inflation is falling again in late 2023, stocks are rising again.
The story of the stock market over the past two years is shockingly simple: When inflation rises, stocks fall; when inflation falls, stocks rise.
Right now, inflation is falling, and stocks are rising. Inflation is projected to continue falling in December and into early 2024.
That means stocks are likely to keep rising as well.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.