September Surge on Horizon as Reinfation Fears Vanish: Stocks Set to Rally
In a surprising turn of events, it seems that the August stock market selloff was just a blip on the radar. Despite a brief retreat of about 5% in the first three weeks of the month, stocks have come roaring back in the final week, bringing the S&P 500 within striking distance of a new high. Investors can now prepare themselves for a new stock market rally that is set to take place in September.
One of the key factors contributing to this upcoming surge is the latest inflation data released this morning. The July Personal Consumption Expenditures report revealed that while there was a slight increase in core inflation rates from 4.1% to 4.2% in July, this was solely due to base effects. In other words, the comparison with the inflation rates from a year ago resulted in an artificial bump, which does not reflect the real core inflation trend.
Looking at a more accurate six-month rolling basis, the core inflation rate actually dropped to 3.4% in July. On a three-month rolling basis, it fell even further to just 2.9%, which is very close to the Federal Reserve’s target of 2%. This data sets the stage for a massive September surge in the stock market.
The main drivers behind the August selloff were reinflation fears and spiking yields. However, today’s inflation data essentially eliminates these concerns. The current reinflation is solely attributed to base effects, and once those effects are wiped away, the core inflation trend remains one of lower inflation. Moreover, the impact of base effects will become less pronounced in the coming month, with the Cleveland Fed’s Nowcast model predicting a further drop in core inflation for August.
Additionally, Treasury yields, which experienced a spike throughout August, have started to plummet in the past week. This sharp decline is a direct result of consistently soft economic and inflation data. Leading indicators indicate that this trend of falling yields is likely to continue.
Based on the short-term data and our analysis, it is reasonable to expect that as reinflation fears turn into disinflation hopes and spiking yields transform into falling yields, the August selloff will be swiftly followed by a September surge.
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Disclaimer: The author of this article, Luke Lango, does not hold any positions in the securities mentioned.
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