For the past two years, inflation has proven to be the stock market’s No. 1 enemy. But this morning’s Consumer Price Index (CPI) report showed that the inflation problem is largely behind us now. And as a result, stocks have the ‘green light’ to rally on.
Of course, CPI is widely considered the nation’s best inflation gauge. And the index’s July report, released today, showed that the U.S. inflation rate dropped from 3% in June to 2.9%, down from a high of 9% two summers ago.
At 2.9%, the current inflation rate is the lowest it has been since March 2021.
In fact, since 1984, the U.S. inflation rate has averaged 2.9%. That means we have finally landed in ‘back-to-normal’ territory.
And to us, that signals that some explosive stock gains are coming down the pike.
Normal CPI Levels Mean Rate Cuts Ahead
Now, on top of arriving at a long-term CPI average of 2.9%, the Cleveland Federal Reserve’s real-time estimates for August’s inflation rate are also hovering at 2.6%. That means inflation is set to drop to below-normal levels this month.
It appears the inflation problem has finally been fixed.
Now that that’s the case, the U.S. Federal Reserve can lower interest rates – which, coincidentally, should provide stocks with the fuel they need to keep rising.
At the moment, the market is pricing in between eight and nine rate cuts over the next year, with the first starting next month.
That’s enormously positive news.
Higher rates choked off economic activity over the past two years, freezing the housing market, stifling the auto market – suppressing pretty much every debt-driven market out there. For example, just yesterday, Home Depot (HD) said that high interest rates have significantly dampened demand for remodeling and construction projects.
But now, with inflation tamped down to normal levels, lower interest rates will reinvigorate economic activity over the next two years. The housing market will heat back up as mortgage rates fall. The auto market will surge once again as auto financing rates drop. People will start remodeling, and construction projects will pick back up.
The economy will get back into a winning groove – and so will the stock market.
The Final Word
Yes, stocks have been pushing higher all year long (despite, of course, the market’s recent selloff). But that rally has been driven primarily by a few big AI stocks, like Nvidia’s (NVDA), which is up nearly 140% year-to-date. But the Russell 2000 – full of small-cap stocks that, in my view, represent “real” America – is up just 2% this year.
So, in reality, a few AI stocks have been rallying. But the rest of the market has been stuck in neutral.
Rate cuts will change that.
They’ll recharge the economy in a broad, healthy manner that will support “real” America and power a big rally in all stocks – not just the big AI winners.
That’s why we think the market just got the ‘green light’ to rally. Today’s soft inflation report confirmed that the Fed can and will cut interest rates, starting next month, which means the economy will start its recovery very soon. As it does, the whole market should rally.
And in fact, for the past few weeks, we’ve been on a stock buying frenzy in anticipation of this big rally.
Check out a few of the picks we like right now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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