December 05, 2022

There’s been positive news on inflation. Unsurprisingly, many stock traders and opinionators acted as if the “good ol’ days” of constantly rising markets were back. Peak inflation must be behind us, right?

Well, a positive inflation reading doesn’t change the fact that inflation is still high. And while we may not want to admit it, inflation is likely to get worse before it gets better.

Looking back at history, we can see significant peaks in the U.S. inflation rate often occurred during a recession or just after one. So, if inflation peaked in October of this year, we’re faced with two possible outcomes.

One is we’re already in a recession. We won’t know that until the lagging data points catch up. But looking at the current environment, it seems unlikely (though possible) we’re in a recession.

The other possible outcome is this time is different. Again, this is possible. But is it likely? Due to the states of supply and demand right now, I’d say no.

All in all, it seems unlikely that October was the beginning of the end for our inflation issues.

In 1970, 1974, 1980, and 2008 cyclical peaks in inflation occurred during periods when inflation was accelerating structurally – that is, there were profound changes to underlying supply and demand. Each year bullish investors were stung as cash outperformed the S&P 500.

It’s almost never been profitable to buy the U.S. stock market when real 10-year Treasury yields were negative. It’s almost always been profitable to wait to invest in equities until real yields return to positive territory.

Another interesting note is related to energy. Prices for energy are soaring. In the past, U.S. inflation has almost never peaked when energy prices rise faster than the S&P 500.

We’re not out of the inflationary woods yet.

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