If I surveyed investors and asked what the biggest influence was on the market so far this year, I bet most if not all would say answer inflation or interest rates. The two are interrelated, so in a way, both are correct.

Inflation forces the Federal Reserve to raise rates, which slows the economy and puts pressure on high growth stocks, which often need to borrow money to fuel expansion. It has also created havoc with bond yields.

That’s why inflation data and Federal Reserve interest-rate decisions are the most important market events right now.

There’s no Fed meeting in August, so yesterday’s inflation report carried even more weight as investors set expectations for what will happen in September.

The report was better than expected, so let’s talk in today’s Market 360 about what it means for the Fed and the stock market…

The End of Rate Cuts Is in Sight

I’ve told my readers for a while now that core inflation (excluding energy and food prices) peaked back in March, even though it may not have felt like it. Yesterday’s Consumer Price Index (CPI) data further confirmed that, which is very good news.

Prices were basically unchanged from June to July, so inflation is definitely cooling off. The biggest drop was in energy as gas prices fell 7.7% and fuel oil dropped 11%.

You know as well as I do that there is still inflation out there, but we knew that would be the case. Food prices rose about 1%, and rent costs also bumped up.

But the trend is now decreasing inflation. The big deal – and the reason the market took off yesterday and held those gains today – is what this means for the next Fed meeting on September 21.

I am now very confident in saying that September 21 will be the last rate hike. I expect a third increase of three-quarters of a percent (75 basis points), but if Treasury yields continue to fall, the Fed might be able to increase just half a percent.

And then I think the Fed will be done, at least for a bit.

There is no meeting in October, and I don’t see any way they raise rates at the November 1-2 meeting. That is one week before Election Day, and adjusting interest rates that close to an election is a longstanding Fed taboo.

That leaves December 14 as the next possible rate hike, which is four months away. An unscheduled emergency meeting is possible, but they are rare, and the data doesn’t point to a need for that. With inflation cooling, I think there is a good chance the Fed hits the pause button after a September increase.

Ten days later we get end of the quarter, the next earnings announcement season begins, and we are in what is historically the strongest time of the year for stocks.

That makes now a great time to fine tune your portfolios.

I am doing that for my clients and in our newsletters, making sure we are invested in best companies with superior fundamentals, strong earnings and sales growth, positive analysts’ estimates revisions, and other important metrics I consider.

It may surprise some people, but there are quality stocks out there growing sales and earnings even in this slower economy. If you’re not sure where to look, check out the energy sector. We’ve done very well there this year, and we’re not done yet.

I also advise you to check analysts’ estimates. They are starting to come down for some companies, and that is a big red flag for me. Negative analysts’ revisions are a reason to at least think about trimming or selling. It’s very difficult to fight the analyst community. It’s big. Analysts controls stocks more than anybody. And they tend to move in herds.

This week’s inflation data was the kind of good news we’ve been waiting for. I’m sure we’ll see more volatility over the next six weeks before the September Fed meeting, but the outlook continues to brighten for a big rally and strong finish to the year.

Now’s a good time to get ready.

Sincerely,

Louis Navellier, Market 360