They are wrong about what’s coming next
Former Treasury Secretary Larry Summers warns of a 2nd wave of inflation
Citing high government and deficit spending
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Let’s explore whether we're seeing signs of this 2nd wave
And its potential impact on the stock market
In early 2024, super core inflation indicated a significant uptick in inflationary forces
Reminiscent of the 1970s
However, this metric has since cooled down
Suggesting that a 2nd wave of inflation might not be imminent
But are there risks ahead?
To fully understand inflation trends, we must consider energy, food, and shelter prices, which super core inflation excludes
Rising food and energy costs directly impact the prices of other goods, making them critical factors to watch
Gasoline prices at US pumps have steadily declined since June 2022
Showing no clear signs of a 2nd inflation wave
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Although there's been a slight increase since Jan 2024
Crude oil prices have dropped over the last 3 months
Suggesting gasoline is likely to decline too
Food inflation currently sits at 2%, a reasonable level compared to the past 20 years
Just 2 years ago, food inflation was at 11%
Right now, there's no indication that food inflation is picking back up again
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So, what does this mean for the stock market?
Stocks are deeply affected by inflation due to the Fed’s actions in response to it
In early 2021, inflation was high, but the market continued to rise
t’s only when the Fed began talking about raising rates, the stock market dropped by 25%
Even after inflation peaked in June 2022, the market kept declining until the Fed considered pausing hikes
The real impact on stocks hinges on the Fed's decisions
The Fed has maintained rates just above 5% since Aug 2023
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Every hint of rate cuts has boosted the stock market
This trend suggests a high likelihood of further market gains
In the Fed's last meeting, Jerome Powell stated they weren't ready to cut rates yet due to persistent inflation
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Despite this, the S&P 500 surged following the meeting
However, the market's reaction might not reflect the underlying reality
The equal-weighted S&P 500 index, $RSP, removes the outsized influence of giants like Nvidia, Microsoft, and Apple
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This index has been trending down recently, signaling divergence from the broader S&P 500
Some believe this indicates bad news for the S&P 500, predicting a correction
But our perspective is that $RSP could catch up to the S&P 500, leading the market higher
14/ Core inflation in the US is now at one of its lowest levels in the past 4 years
Even lower than in June 2023 when the Fed paused rate hikes
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This could prompt the Fed to cut rates more aggressively than investors expect
Potentially driving the market higher for a final thrust
We've managed to keep our members on the right side of the market throughout 2024
Including the correction in March 2024
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And then picking up cheap stocks in April of 2024
And riding them for some fantastic Trades over the last few months
