The Fed will likely begin cutting interest rates in the months ahead, for good reason.
Last week felt like a victory against high inflation:
We’ve now had no price increases on the overall inflation rate for two months.1
Some pundits still aren’t so sure it’s time to take a victory lap just yet.
What about the 1970s?
There was a spike in inflation at the outset of the decade, it fell, then re-accelerated:
There are many differences between this economic period and the 1970s. People who want to use the 1970s analogy always fail to mention that inflation fell in the middle of that decade because of a painful recession. The stock market had a massive crash in 1973-74.
This time we brought inflation down without a recession.
Plus, inflation was global in nature and it’s fallen across the developed world concurrently:
Inflation is in a much better place than it was 18-24 months ago.
Still, some people want to wait for the coast to clear to be sure this inflationary period is over.
Fair enough.
The stock market doesn’t wait for the coast to clear.
The S&P 500 bottomed when inflation was still over 8% back in the fall of 2022:
Inflation had fallen slightly from the peak but if you go back and look at the headlines in October 2022, no one thought the worst of the pain was over. A recession was the consensus forecast:
Stagflation. Higher for longer. Pain ahead. Things felt bleak.
The S&P 500 is up more than 50% since inflation hit more than 9% in June 2022.
Look, it’s always easier to talk about stock market bottoms with the benefit of hindsight. No one ever knows just how bad things are going to get when we’re living through a nasty downturn.
But the point here is that buying opportunities in a bear market always seem obvious and easy after the fact, but never in real-time.
Economists can wait for the coast to clear before taking a victory lap on inflation and cutting rates.
The stock market does not wait.
There is no signal when the coast is clear. No one rings a bell at the bottom to let everyone know it’s time to buy. The stock market doesn’t wait for the good news to happen; it anticipates it ahead of time (sometimes right, sometimes wrong).
You can’t wait until the coast is clear to invest during a bear market. The bear market will be over before the economic data turns positive.
Michael and I talked about inflation, the stock market, Kevin Bacon and much more on this week’s Animal Spirits video:
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Further reading:
Why Today’s Inflation is Not a Repeat of the 1970s
Now here’s what I’ve been reading lately:
- Lessons from Bessimbinder (Baillie Gifford)
- Habits determine your future (A Teachable Moment)
- 3 flawed economic narratives that won’t go away (Discipline Funds)
- The nothingness of money (More To That)
- Family money (Money with Katie)
Books:
1Inflation is never “done” in the sense that prices are almost always rising. It’s just rising at a more reasonable rate.
