Don’t Let the Inflation Rollercoaster Scare You Out of Stocks

Rollercoasters seem to be one of those love ’em or hate ’em kind of things.

Personally, I’m a huge fan – of the amusement park ones, that is. But whether you like those or not, we all hate the inflation-interest rate coaster we’re riding right now.

On Wednesday, consumer prices rose more than expected. Down we go.

Today, wholesale prices rose less than expected. Ahhh… a smoother stretch.

We’ve been on this ride for two years now – since March 16, 2022 – and you can see the ups and downs in the S&P 500 along the way.

We endured a few dips over the last month, but nothing major. And best of all, when we finally get off this rollercoaster, we’ll be much higher than when we got on.

Data Shows Lower Rates Are Coming

With the Federal Reserve and investors expecting three rate cuts in 2024, yesterday’s data showing consumer prices increased more than expected called into question whether the Fed will be able to pull that off.

The first thing to remember is that the Fed hasn’t raised rates in nine months. The last hike was on July 26, and that preceded a very unpleasant three months going mostly downhill. But the climb these last six months has been impressive.

Stocks have proven they can soar with inflation and interest rates where they are. The key now is earnings – and we just happen to be kicking off the next reporting season tomorrow.

I expect the trend to continue here as well – which is great, because the data is positive.

Over the last 10 years, 74% of S&P 500 companies beat analysts’ earnings estimates and 64% topped revenue estimates. (Either analysts are lousy at their job or they want to aim low, but that’s a conversation for another day.)

Upcoming earnings will likely stick close to this well-established pattern. Based on history, I expect somewhere around 79% of companies to beat on earnings and 67% on sales estimates when they report first-quarter results.

If we come even remotely close to that, it means the economy remains strong and that companies are making sales and earning profits. That’s ultimately what moves stocks higher.

Sure, inflation is higher than we want it to be. But it’s way down from its peak of 9.2% in June 2022.

And how’s this for perspective? The current inflation rate – 3.5% – is below the 64-year average of 3.77%. The S&P 500 is more than 8X higher in that time, when inflation averaged more than it does right now.

Now is Still a Great Time for Great Stocks

Investors are now fixated on when the Fed will cut rates and how many times in 2024.

Those are important questions, yes, but not the most important.

We know lower interest rates are coming, and that’s what really matters. Why else would stocks have soared the last five months?

Multiple data points support lower rates, from inflation’s strong downtrend to current rates actually above the 64-year average to the unusually big spread between rates and inflation. Interest rates (5.3%) are more than 50% higher than inflation (3.5%). Historically, that spread is just 1.03%, so it will narrow.

Plus, interest rates are rarely higher than inflation to begin with, and they are dramatically higher now.

What’s more, Big Money has yet to flip to any kind of pronounced selling. Going back to last November when the huge rally started, the biggest investors in the world simply aren’t dumping stocks.

My Quantum Edge system detected 75 unusually heavy sells yesterday, which is more than we’ve seen most of the last few months but was exceeded in both mid-February and mid-March. It doesn’t come close to last October when we were picking up more than 300 sell signals in a day.

It’s still time to own stocks. Economic data, stock data, and my own quantitative data all point to higher prices ahead. We never know what the day-to-day path getting there will look like, but don’t let that scare you out of owning the highest-quality stocks in the market right now.

As regular readers know, you want to own stocks with growing businesses (as measured by fundamentals), strong trading action (as measured by technicals), and loads of Big Money interest and support.

There are great stocks out there right now with this Quantum Edge trifecta, and those rollercoaster dips are great opportunities to jump on for the ride higher.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends