Wall Street loved yesterday’s November Consumer Price Index (It confirms that 2023 is going to be a blockbuster year for the stock market ) report. It showed that inflation is cooling much more quickly than expected. I loved the CPI report, too – but for a different reason. .
The logic is simple.
Inflation is crashing. And 100 years of economic history suggests that this inflation crash will continue throughout 2023. If it does, that will set the stage for the Fed to pivot on its hawkish monetary policy. Instead of making things harder for Americans in 2023, the Fed will start making things easier. That will help to stabilize the U.S. economy. And stocks will proceed to soar in a manner they’ve only done a handful of times over the past century.
I earnestly believe smart investors will make fortunes over the next 12 months. But you have to be positioned correctly to reap the full rewards.
The question is, are you?
Let’s find out.
Disinflation Cycles Last a Long Time
I know everyone is still talking about inflation and high prices. But by now, the data is 100% clear – we’re in a disinflation cycle.
Inflation has slowed for five consecutive months and has dropped sharply from 9.1% to 7.1%. One month doesn’t define a trend. Nor do two months. But what about five months and 200 basis points of disinflation?
That’s not a fluke. That’s a disinflation cycle.
History suggests this cycle has only just begun.
That is, going back 100 years, the U.S. economy has undergone seven previous disinflation cycles similar to the current one (inflation starts to rapidly cool after a period of stubbornly high inflation).
All seven lasted at least 14 months. All seven comprised at least 350 basis points of disinflation.
Indeed, on average, disinflation cycles like the one we’re currently in tended to last two to three years. And they usually cut about 1,000 basis points off the inflation rate.
We’re only five months and 200 basis points into this disinflation cycle.
Therefore, history says that the disinflation ball game is still in the second or third inning. Throughout 2023, inflation will continue to cool. And by late 2023 or early 2024, we will likely be looking at 2% or lower inflation rates.
A “Soft Landing” for the U.S. Economy
In order for the stock market to rebound next year, we need three things to happen. Inflation needs to cool. The Fed needs to respond by stopping its rate-hike campaign. And both need to happen before the U.S. economy slips into a recession.
Yesterday’s data strongly confirms that we will get all three in short order.
As outlined above, inflation will cool dramatically next year, so check that off the list. And as for the central bank, the recent dovish shift in language from multiple Fed members strongly suggest they’re ready and willing to pivot if inflation keeps cooling (as it will in 2023).
Therefore, the only thing we really have to worry about is whether or not the economy will tip into a recession. And yesterday’s data strongly suggests it won’t.
The most impressive thing about the current round of disinflation is that we’ve shaved off about 200 basis points from headline inflation without doing much damage to the labor market.
Typically, it requires significant labor market weakness to bring down inflation. For example, in the 1970s and ‘80s, we didn’t see 200 basis points of disinflation until the unemployment rate had spiked to above 5%. This time around, we’re at 200 basis points of disinflation, yet the unemployment rate has barely moved higher and sits at 3.7%.
There is only one historical precedent for this (big disinflation without a big spike in unemployment). That’s the early 1950s, when inflation crashed from 6% to 2% without unemployment spiking and without the U.S. economy contracting.
In other words, what the U.S. economy is doing right now (significant disinflation without labor market weakness) has only happened once before. And when it did happen before, the economy crushed inflation without a recession or even negative growth.
Therefore, it appears increasingly likely that we will get the “Big 3” for stocks in 2023: falling inflation, a dovish Fed pivot, and no recession.
The Final Word on Falling Inflation
I study and analyze markets all day, every day. And all the data I’m looking at strongly suggests 2023 could be a record-breaking year for stocks.
My InvestorPlace colleagues agree. Macro investing genius Eric Fry and legendary growth investor Louis Navellier both believe that 2023 will be a great year for the market.
So, last night, we all sat down for a roundtable discussion to “talk shop” about the markets going into 2023.
In the event, we unveiled three top hypergrowth stocks to buy for 2023. And we even gave viewers a chance to access a full portfolio of our top stock picks for the new year.
Missed that event? Don’t worry. You still have time to capitalize on the coming bull market because it hasn’t arrived just yet.
But it will any day now. So, hurry while you can, and watch the replay of our event.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.